Financial Feasibility: A) Current Ratio:-Current Assets Current Liabilities

Financial feasibility
In financial feasibility study bank demand bank statement, income tax return file, audited
financial statement, projected financial statement and any other document necessary as per loan
requirement. From this important ratio are calculated which are as under:
1) Liquidity Ratio:-
The liquidity ratio is shown the short cash rising capacity of company. It will show the liquid
form of assets within organization which easily convertible into cash. It include:
A) Current Ratio:- Current Assets

Current Liabilities
It will indicate the short term liquidity position of the company. The bank provide working
capital for business enterprises on basis of ‘Working Capital Gap’; this will also key indicator of
‘Margin Of Safety’. According to Tandan Committee norms 1.33 is the desirable current ratio.
B) Quick ratio:- Quick Assets

Quick Liabilities
The quick ratio is shown the high liquid position of the company. It show the overnight cash
generation capacity of the company. It take only cash and bank balance from view point of
financial statement, but the practically we also required to consider credit worthiness in market
by which the company generate cash in overnight. The standard quick ratio is the 1:1.
2) Leverage Ratio:-
The leverage ratio shown the efficiency level prevails in the processing activity of the company.
This help to decide the earning capacity of business operations. It include:
A) Debtors’ ratio:- Average Debtor *365

Credit Sales
This indicates the number of day’s sales blocked up in receivables. More and more credit sales
with longer credit terms reduce the profit of the business and also increase chance of bad debts.
Practical application
An age wise analysis of debtors will help in understanding the problem in identifying the slow
paymaster for vigorous follow up and recovery of dues. Like stock, the level of debtors must also
have reasonable proportion to sales an increasing trend in ratio indicate improvement in firm
debtor’s management.
B) Creditors’ ratio:- Average Creditors *365

Credit Purchase
This ratio tells how many days’ credit the firms receive from its suppliers. Is the firm paying its
creditors too quickly and will it be possible to delay the payment a little without spoiling its
reputation and will it be possible to negotiate for a discount.
No norms are stipulated. Therefore comparisons should be made with the past trends of unit and
the trends of other unit within the industry. Generally, ratios are calculated on the basis of last
days figure appearing in balance sheet. To ensure accuracy and to be more specific such ratio
should be calculated on the basis of figures given on monthly stock/debtors statements submitted
by borrower.
C) Stock Turnover Ratio:- Cost of Goods Sold

Average Inventory
The stock turnover ratio shown at how much time stock gets move into the business. There is no
as such standard ratio but for trading it will be ten to twelve times or for manufacturing it will be
four to five times.
3) Profitability Ratio:-
The profitability ratio had shown the earning capacity of business which in return shows the
repayment capacity of the business concern loan.
A) Net Profit Ratio:- Net Profit *100
Sales
The net profit ratio has shown the profit after tax.
B) Gross Profit Ratio:- Gross Profit *100

Sales
The gross profit is calculated on by subtracting cost of goods from the sales.
The trend in the profit and sales over period of time is also taking in the consideration. The
upward movements add point in the rating where as downward movement creates negative
impact on credit assessment. The retention of profit in business also add positive point in the
credit assessment. The projection made are compare with the actual result which show the target
achievement capacity of company.
C) Operating Profit Ratio= Operating Profit *100

Sales
The operating profit show the actual cash flow profit earned from the operation of business. It is
the important ratio it term of analyze the operational viability of business of company.
4) Financial structure group ratio:-

These ratios measure the relationship between owned funds and borrowed funds. Ratio gives the
answer to key question. How much to lend? it defines the outer boundaries for giving term loan.
It include:
A) Debt-Equity = Debt
Equity
The debt equity is the most important ratio of determine the credit deployment to any borrower.
In this take long term liability as well as short term liability of the company by the bank. In
equity it include the share capital plus reserve and profit and loss accumulated and subtracted
the fictitious assets. It also include the ‘Quasi Capital’ which the relative borrower given. The
standard debt equity is deffer from the industry to the industry i. e. for manufacturing it is the 3
times etc.
B) Total outside Liability to Equity = Total outside Liability

Equity
Total outside liability:-
Means the total of the liability side of balance sheet minus the net worth. This is the amount the
business owes to outsiders.
In India maximum permissible debt/equity ratio is 2 for medium and large industries and 3 for
small industries. Then medium and large industries can avail TL up to twice the amount of their
net worth. SSI unit can avail TL up to three times of their net worth.
Practical application:-
This ratio is used by bankers in credit appraisal, especially TL appraisals. Low debt/equity ratio
indicates strong financial position. When the burden of debt is heavy it reduces the safety margin
of banker / lender. It is safer to lend to a firm with strong financial position.
5) Risk Assessment Group:-

Lending banker faces two risks - Non- payment of interest and Non-payment of installment
(principal). The ICR measures the extent of the first risk. The DSCR measures the extent of both
risks in respect of TL.
A) Interest coverage ratio (ICR)= Profit Before Tax + Depreciation + Interest
Gross interest (TL + WC)
This measures the relationship between the projected profit before tax, interest and depreciation (
i. e. projected income) and projected interest cost both on TL and WC finance i. e. gross interest
payable by the borrower. Higher the ratio, greater the cushion. ICR of 3 or 4 times of gross
interest can be considered to be satisfactory; ratio of less than 1 is unacceptable.
B) Debt Service Coverage Ratio ( DSCR)=Profit after tax + depreciation + interest on TL
Interest on TL + repayment
This ratio measures relationship between the projected profit after tax (after addition back
depreciation and interest on TL) and the amount of interest and installment payable normally.
Practical application:-
DSCR is a powerful tool used by the banker in assessing the risk. It has widespread application
in the appraisal of term loans. Unlike most other ratios DSCR focuses on the future.
Traditionally banker have to examine the 3 CS of leading, namely character, capital and capacity
of borrower before sanctioning of any loan. Ratio enables banker to judge the repaying capacity
of borrower. DCSR is around 2 is consider as satisfactory. Generally, 1.5 is accepted as standard
and acceptable; less than 1 is not acceptable and indicates poor repaying capacity.

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Financial feasibility

A) Current Ratio:- Current Assets

B) Quick ratio:- Quick Assets

A) Debtors’ ratio:- Average Debtor *365

B) Creditors’ ratio:- Average Creditors *365

C) Stock Turnover Ratio:- Cost of Goods Sold

B) Gross Profit Ratio:- Gross Profit *100

C) Operating Profit Ratio= Operating Profit *100

4) Financial structure group ratio:-

B) Total outside Liability to Equity = Total outside Liability

5) Risk Assessment Group:-

Gross interest (TL + WC)

B) Debt Service Coverage Ratio ( DSCR)=Profit after tax + depreciation + interest on TL

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