📊 1. Debt Service Coverage Ratio (DSCR) – Most Important

Formula:
Net Operating Income / Total Debt Service

  • Target: ✅ 1.25x or higher

  • Shows if your business can cover loan payments with existing cash flow.

  • If your DSCR is below 1.15, most lenders will flag the file as risky.

✅ Tip: Add back depreciation, amortization, and interest to net income to calculate NOI for DSCR.

💸 2. Debt-to-Equity Ratio

Formula:
Total Liabilities / Shareholder Equity

  • Target: ✅ Less than 2:1 (but some industries allow up to 3:1)

  • Measures how much debt your business carries relative to owner's investment.

  • Lower is better — shows financial stability and commitment from ownership.

📉 3. Current Ratio

Formula:
Current Assets / Current Liabilities

  • Target: ✅ 1.25 or higher

  • Indicates ability to pay short-term obligations.

  • Manufacturing companies should especially maintain this, since they have inventory and supply chain obligations.

🔄 4. Quick Ratio (Acid Test)

Formula:
(Cash + Accounts Receivable) / Current Liabilities

  • Target: ✅ 1.0 or higher

  • Excludes inventory from assets (less conservative than current ratio)

  • Especially relevant if your manufacturing company holds a lot of inventory, which can skew the current ratio.

💰 5. Gross Profit Margin

Formula:
(Revenue - Cost of Goods Sold) / Revenue

  • Target: Depends on manufacturing niche, but generally 30%-60%

  • Indicates how efficiently your business produces goods

📈 6. Net Profit Margin

Formula:
Net Profit / Revenue

  • Target: 8%–20% or higher is healthy for small manufacturers.

  • Shows overall profitability — key to prove repayment ability.

🏭 Manufacturing-Specific Ratios to Also Watch

Inventory Turnover Ratio:

Formula:
COGS / Average Inventory

  • Target: Varies by product; higher is better (efficient inventory management)

Operating Margin:

Formula:
Operating Income / Revenue

  • Important if you're scaling operations, investing in equipment, or funding growth

✅ What Lenders Want to See

  • Stable and growing revenue

  • Predictable cash flow

  • Low leverage (manageable debt)

  • Healthy liquidity (cash + working capital)

  • Business owner putting in equity (skin in the game)