What do credit ratios measure?

Credit ratios are key financial metrics that assess a company's capacity to meet its long-term obligations, such as loans and bonds. These ratios provide insight into the firm's financial strength and stability, specifically focusing on its leverage and debt levels compared to its overall finances. By analyzing these ratios, stakeholders can gauge whether a company is likely to meet its debt payments and maintain solvency over time, which is crucial for lenders, investors, and creditors.

While profitability over time, asset value, and efficiency of capital usage are important aspects of financial analysis, they do not directly measure the ability of a company to fulfill its long-term financial commitments. Credit ratios, like the debt-to-equity ratio or the interest coverage ratio, specifically target the relationship between a company’s debt and its equity or earnings, making them essential for understanding financial health in the context of creditor risk and overall creditworthiness.