Banking · Credit Appraisal and Financial Ratios
In the process of credit appraisal for a long-term project, which specific financial ratio is considered the most critical indicator of the borrower's ability to service the debt interest and principal repayments from the cash flows generated by the project itself?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The Current Ratio which measures the ability of a firm to meet its short-term obligations.
- 2The Debt Service Coverage Ratio which relates the net cash accruals to the total debt service obligations.✓
- 3The Asset Turnover Ratio which measures the efficiency of a firm in using its assets to generate sales.
- 4The Proprietary Ratio which indicates the proportion of total assets funded by the owners' capital.
Correct answer
The Debt Service Coverage Ratio which relates the net cash accruals to the total debt service obligations.
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