Question
In the context of credit risk assessment, which of the
following metrics would be the most reliable for an MSME lender to assess the long-term financial stability of a business, especially when the company is facing difficulties in the international markets?Solution
The Debt-Service Coverage Ratio (DSCR) measures an MSME’s ability to meet its debt obligations from its operating income. A higher DSCR indicates that the company is generating enough cash to service its debt, which is particularly important when the firm is facing challenges in international markets that could affect its revenues. This ratio provides a more accurate picture of long-term financial stability compared to other liquidity or profitability ratios.
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