Essential Ratios to be Kept in mind Before taking Business Loan

1. ROCE :-

Capital Employed = Shareholders’ Fund + Long Term Debt
ROCE should always be higher than the rate at which the company borrows. • ROCE ratio can assist in determining how successfully an entity generates profits from its Capital Employed when it is used.
This explains that how much Profit (Earning) of the entity is available for Shareholders and Long-Term Borrowers (Loan, Debentures, etc.)
Ideal ROCE for Business Loan should be more than Its Interest Rate on Borrowings.

2. DEBT / EQUITY RATIO :-

The Formula explains that how much of entity’s Total Assets are financed by Long Term Debt.
High Debt Equity = High Risk Entity = High Returns
Low Debt Equity = Low Risk Entity = Low Returns
Ideal Debt Equity Ratio for Business Loan is Less than 3.

3. TOTAL OUTSIDE LIABILITY TO TOTAL NET WORTH RATIO (TOL/TNW):-

TOL/TNW is a measure of a company’s financial leverage calculated by dividing the total liabilities of the company by the total net worth of the business. • This ratio gives an accurate picture of the entity’s reliance on debt. • High TOL/TNW = High Risk Entity = High Returns
Low TOL/TNW = Low Risk Entity = Low Returns
Ideal Debt Equity Ratio for Business Loan is Less than 5.

4. CURRENT RATIO :-

Current Asset = Inventories + Sundry Debtors + Cash and Bank Balances + Receivables/ Accruals + Loans and Advances + Disposable Investments + Any other current assets.
Current Liabilities = Creditors for goods and services + Short-Term Loans + Bank Overdraft + Cash Credit + Outstanding Expenses + Provision for Taxation + Proposed Dividend + Unclaimed Dividend + Any other current liabilities.
Current Ratio is a liquidity ratio that measures an entity’s Ability to pay short-term obligations or those due within One Year.
The current ratio helps investors understand more about a entity’s ability to cover its short-term debt with its current assets.
Ideal Current Ratio for Business Loan is more than 1.33