India Inc’s debt ratios improve marginally for the first time in four years

Amid slowing top lines and falling profits of India Inc during 2014-15, there was a silver lining — a marginal improvement in debt related ratios for the first time in four years.

According to the ET Intelligence Group’s analysis of BSE 200 companies, the debt-to-Ebidta (earnings before interest, depreciation, taxes and amortisation) ratio and interest coverage ratio improve in 2014-15 after deteriorating between 2010-11 and 2013-2014.

The debt-to-Ebidta ratio measures a company’s ability to pay off its debt. The lower the ratio, the higher is the ability of the fi rm to service debt. In 2014-15, the aggregate debt of BSE 200 companies increased 3%, while their Ebidta rose 6%, resulting in a better debt-to-Ebidta ratio, which had steadily increased from 2.41 in 2010-11 to 3.04 in 2013-14; in 2014-15, it dropped to 2.96. For a company, a ratio closer to four is a sign of concern. Although the drop in the ratio is small in FY15, it increases the ability of the companies to service debt.

Interest coverage ratio, which determines a company’s ability to meet interest payments from operating profi t, also improved in the last fi scal year. A higher ratio means healthier profi tability. It had dropped from fi ve in 2010-11 to 3.15 in 2013-14, but rose to 3.39 in 2014-15.

The Ebidta of most companies improved mainly due to lower raw material costs in the last fi scal. Any further improvement in the debt-managing abilities of the companies would depend on faster economic revival in the coming quarters.