Significant ratios for evaluation of finance companies : By Vinod Kothari

Traditional ratio analysis does not always work for finance companies, in view of the nature of their business and the focal areas of managerial attention. The following are some key ratios to evaluate the performance of your company. Best results can be achieved if you:

  1. Monitor these ratios over a period of time;
  2. Compare your performance with that of your peers.

Some useful tips:

  1. Leasing income for finance companies can be a big illusion, particularly where International accounting standards are not being followed. Always take, for the sake of evaluation, leasing income completely net of capital recovery. [In India, this would mean the lease rentals should be taken net of lease equalisation and depreciation].
  2. For effective asset-liability management, classification of assets and liabilities based on their maturities, to see the maturity mismatches, can be a vital tool.


Receivables Past Due 60 Days/Managed Receivables (%)

Measures level of delinquent assets in portfolio.

NPAs/Managed Receivables and OREO (%)

 Measures the percentage of the receivable portfolio that is delinquent or not accruing income. Non-performing assets consist of delinquent and non-accruing receivables and other real estate owned

Reserve/Net Owned Receivables and Reserves (%)

Measures the level of loan loss reserves to the receivable portfolio; provides the level of insulation to the company before equity is impacted in the event of loan losses.

Net Chargeoffs/Average Managed Receivables (%)

Measures the level of losses as a percentage of managed receivables.

Recoveries/Gross Chargeoffs (%)

Measures the level of recoveries as a percentage of total chargeoffs; ratio can provide insight into the conservatism of chargeoff policies, as well as the quality of the collateral.

Funding and Liquidity

Short-Term Debt/Total Debt (%)

Helps ascertain the level of rollover and interest rate risk compared with receivables.

Unused Committed Bank Lines/Commercial Paper (%)

Measures the level of backup liquidity available to the company if it is unable to rollover its commercial paper. Read commercial paper to include inter-corporate deposits taken by the company.


Debt/Equity (x)

Core leverage ratio.

Debt/Tangible Equity (x)

Measures the quality of the equity base adjusted for the level of downside protection to investors.


Net Interest Margin (%)

Net interest income/average earning assets; measures the compensation the company is receiving for the level of credit risk in its receivables portfolio.

Fixed-Charge Coverage (x)

Measures the level of downside protection provided by a company’s operating income to service interest expense and other fixed charges.

Net Income/Average Managed Assets (%)

Measures the profitability of the company’s assets or return on managed assets.

Net Income/Average Equity (%)

Measures the return on the company’s equity base or return on equity.

Earnings Retention and Capital Formation (%)

Measures the level of receivables growth a company can support from internally generated funds.

Leasing Specific

Unguaranteed Estimated Residual/Equity (%)

Measures the proportion of unguaranteed estimated residuals as a percentage of equity; provides insight into the quality of the equity base; and of unguaranteed estimated residuals on income and equity. This is relevant for companies engaged in operating leases or leases with open residual values.

Net Residual Realization/Estimated Residual (%)

Measures the realized gain or loss on the residual at the termination of the lease compared to the estimated residual at the onset of the lease. This is also not relevant for companies engaged in strict financial leases.

EBITDA/Interest Expense (x)

Measures interest coverage based on the lessor’s operating cash flow.

Total Debt/EBITDA

Measures leverage based on the lessor’s operating cash flow.

NPAs – Nonperforming assets. OREO – Other real estate owned. EBITDA – Earnings before interest, taxes, depreciation, and amortization.