How to Use Credit Ratio Analysis

Credit ratio analysis means reading a business's ratios together to judge whether it can pay what it owes. It asks three questions: can the business pay the bills due soon (liquidity), how much of it is financed by debt (solvency), and can it cover the interest on that debt (interest coverage)? One ratio on its own can hide a weakness that another one shows. This page explains how the ratios fit together for a credit decision; each ratio has its own guide, linked below. It doesn't say what any lender requires, and it isn't lending advice.

Billed publishes this page. Quotes are from the open textbook OpenStax Principles of Finance 2e, sections 6.3, 6.4 and 19.4 and the chapter 6 key terms, opened on October 30, 2026.

Who uses credit analysis

• Lenders. Of the times interest earned ratio, OpenStax says: "Lenders will pay attention to this ratio before extending credit."
• Suppliers and other businesses that sell on credit. OpenStax, section 19.4: "Creditworthiness is judged by looking at a number of factors including an evaluation of the customer’s financial statements, financial ratios, and credit reports (credit scores) based on a customer’s payment history on credits owed to other firms."

So the same ratios matter when you ask for credit and when you give it to a customer.

Three questions, three groups of ratios

1. Can it pay the bills due soon? Liquidity

OpenStax defines the current ratio as "current assets divided by current liabilities; used to determine a company’s liquidity (ability to meet short-term obligations)". The quick ratio and cash ratio narrow current assets down to the ones closest to cash. For each formula and how to read it, see what is liquidity.

2. How much is financed by debt? Solvency

OpenStax's definitions:

• Debt-to-assets ratio: "measures the portion of debt used by a company relative to the amount of assets"
• Debt-to-equity ratio: "measures the portion of debt used by a company relative to the amount of stockholders’ equity"

Both use total liabilities. See what is debt ratio and what is the debt-to-equity ratio.

3. Can it cover its interest? Interest coverage

OpenStax defines the times interest earned (TIE) ratio as one that "measures the company’s ability to pay interest expense on long-term debt incurred". Section 6.4 words it more broadly: "The times interest earned (TIE) ratio measures the company’s ability to pay interest expense on all debt incurred." It's earnings before interest and taxes (EBIT) divided by interest expense, so interest on all borrowing counts, not only long-term debt. Section 6.4 adds: "The more times over a company can cover interest, the more likely a lender will extend long-term credit." For EBIT itself, see what is EBIT.

Reading the ratios together

OpenStax, section 6.3: "it’s recommended that ratios be used in conjunction with one another." Its example: "An analyst would likely look at the high current ratio and low accounts receivable turnover to begin asking questions about management performance, as this might indicate a trouble area (high inventory and slow collections)."

Combinations to look for:

• Current ratio well above the quick ratio: much of the current assets is inventory, so paying short-term bills depends on selling that inventory.
• Liquidity that looks fine with a high share of debt: short-term bills look covered, but long-term obligations are heavy. Check interest coverage next.
• High debt with low interest coverage: interest takes a large share of operating income, so a weaker year leaves less room to pay it.
• Slow collections: receivables that take longer to collect turn into cash later. See accounts receivable turnover.

Compare each ratio with the same business's earlier periods as well as reading it on its own. For the full set of ratio groups, see what is financial ratio analysis.

Sample: reading one company's ratios side by side

These are sample figures for a fictional wholesale business at one year-end.

• Current assets: cash $15,000 + receivables $25,000 + inventory $50,000 = $90,000
• Total assets: $90,000 current + $110,000 equipment and vehicles = $200,000
• Liabilities: current liabilities $50,000 + a long-term loan of $70,000 = $120,000
• Equity: $200,000 - $120,000 = $80,000
• For the year: EBIT (operating income) $30,000; interest expense $5,000

The ratios:

1. Current ratio: $90,000 ÷ $50,000 = 1.8
2. Quick ratio: ($15,000 + $25,000) ÷ $50,000 = 0.8
3. Debt-to-assets: $120,000 ÷ $200,000 = 0.60
4. Debt-to-equity: $120,000 ÷ $80,000 = 1.5
5. Times interest earned: $30,000 ÷ $5,000 = 6.0 times

Read together: the current ratio of 1.8 drops to 0.8 once inventory is left out, because $50,000 of the $90,000 of current assets is inventory. Liabilities finance 60% of the assets, $1.50 for every $1.00 of equity. Operating income covers interest expense 6 times. The questions this raises are how quickly the inventory sells and how much of the $50,000 of current liabilities falls due before it does. The sample doesn't say whether these figures would meet any lender's terms.

Where Billed fits

When you sell to customers on credit, OpenStax lists their payment history with you as one of the things to evaluate. Billed's client management page says: "Keep a comprehensive record of all payments in one place, easily track payment history, stay informed about outstanding balances, and send payment reminders using Billed client management." Its financial reporting page says: "All reports in Billed can be exported for use with your accountant, bookkeeper, or tax software."

When this guide isn't for you

If you're applying for a loan, or a loan agreement sets ratio requirements, ask the lender how it calculates each ratio, and ask your accountant to prepare the figures.

Related Articles

• What Is Liquidity? Your Simple Guide to the Quick Ratio
• What is Debt Ratio: How to Calculate it?
• What Is the Debt-to-Equity Ratio? Leverage for Small Businesses
• What Is Financial Ratio Analysis? A Simple Guide for Small Business
• What Is Earnings Before Interest and Taxes (EBIT)? A Simple Guide for Small Business

Frequently Asked Questions

What is credit ratio analysis?

Reading a business's ratios together to judge whether it can pay what it owes: liquidity for bills due soon, solvency for its overall debt, and interest coverage for the interest on that debt.

Which ratios are used in credit analysis?

Liquidity ratios such as the current and quick ratios, solvency ratios such as debt-to-assets and debt-to-equity, and the times interest earned ratio for interest coverage.

How do you calculate times interest earned?

Divide earnings before interest and taxes (EBIT) by interest expense. In the sample on this page, $30,000 ÷ $5,000 = 6.0 times.

Why read the ratios together?

One ratio can hide a weakness that another shows. In the sample, the current ratio is 1.8, but the quick ratio is 0.8 once inventory is left out.

What do suppliers look at before giving trade credit?

OpenStax says creditworthiness is judged by looking at factors including the customer's financial statements, financial ratios and credit reports, and that a customer's payment history with the firm is also carefully evaluated before additional credit is granted.