FINANCING

of
INFRASTRUCTURE
PROJECTS
VALUING
PROJECTS
Presented by:
Mohit Rai
CREDIT RATIOS
 What are credit ratios?
• Credit analysis ratios are tools that assist the credit
analysis process.

• These ratios help determine whether individuals or

corporations are capable of fulfilling financial
obligations.

• Credit analysis involves both qualitative and

quantitative aspects.
continued….
 What are credit ratios?
Key ratios can be roughly separated into four groups

PROFITABILITY LEVERAGE

COVERAGE LIQUIDITY
 PROFATIBILITY
• Profitability ratios measure the ability of the company to
generate profit relative to revenue, balance sheet assets, and
shareholders’ equity.
• Profitability ratios are split into margin ratios and return ratios

• Margin ratios include:

• Gross profit margin
• EBITDA margin
• Operating profit margin
 PROFATIBILITY RATIO
• Return Ratios include:
• Return on assets
• Risk-adjusted return
• Return on equity

• Higher margin and return ratios is an indication that a company

has a greater ability to pay back debts.
 LEVERAGE RATIO
• Leverage ratios compare the level of debt against other
accounts on a balance sheet, income statement, or cash flow
statement.

• Leverage ratios include:

• Debt to assets ratio
• Asset to equity ratio
• Debt to equity ratio
• Debt to capital ratio
LEVERAGE RATIO
For example:

If the debt to asset ratio is 0.1, it means debt funds 10% of the
assets and equity funds the remaining 90%

Total cost

10%

90%

Debt Equity Funds

 COVERAGE RATIO
• Coverage ratios measure the coverage that income, cash, or
assets provide for debt or interest expenses.

• Coverage ratios include:

• Interest coverage ratio
• Debt-service coverage ratio
• Cash coverage ratio
• Asset coverage ratio
 COVERAGE RATIO
Example:

A bank is deciding whether to lend money to Company A which has

a debt-service ratio of 10 or Company B that has a debt service ratio
of 5. Company A is a better choice as the ratio suggests this
company’s operating income can cover the total debt 10 times.
 LIQUIDITY RATIO
• Liquidity ratios determine the ability of companies to convert
assets into cash.
• In terms of credit analysis, the ratios show a borrower’s ability to
pay off current debt.

• Liquidity ratios include:

• Current ratio
• Quick ratio
• Cash ratio
• Working capital
ACCOUNTING
RATIOS
 ACCOUNTING RATIO
• Accounting ratio compares two line items in a company’s
financial statements, made up of its:
• Income statement
• Balance sheet
• Cash flow statement.

• These ratios can be used to evaluate a company’s fundamentals

and provide information about the performance of the company
over the years.
OPTIMAL CAPITAL
STRUCTURE
 OPTIMAL CAPITAL STRUCTURE
An optimal capital structure is the objectively best mix of:

PREFERRED COMMON
DEBT STOCK STOCK

That maximizes a company’s market value while minimizing its

cost of capital.
 NEED OF OPTIMAL CAPITAL STRUCTURE?
• Debt financing offers the lowest cost of capital due to its tax
deductibility. However, too much debt increases the financial
risk to shareholders and the return on equity that they require.
• Thus, companies have to find the optimal point at which the
marginal benefit of debt equals the marginal cost.