Debt Ratios Template (Debt-to-Equity, Debt-to-Assets, Coverage)

When a Saudi business owner walks into a bank meeting to request expansion financing or a credit line, the first thing the credit officer opens is not the company story or its ambitious plans. It is a small page with four numbers: debt-to-equity ratio, debt-to-assets ratio, interest coverage ratio, and debt service coverage ratio. These four numbers decide within minutes whether the request will go through or be rejected, what the cost of financing will be, and what collateral will be required.

The problem is that most small and mid-sized businesses in Riyadh, Jeddah, Dammam, and Khobar do not know their debt ratios until a lender asks for them. They then discover, too late, that the ratios are outside the healthy range and that any new loan would choke their cash flow. Sound financial management requires knowing these ratios monthly, not only when requested by a bank, the Saudi Industrial Development Fund, or the Social Development Bank.

This template gives you a clear framework to calculate the four main debt ratios, compare them against sector-specific healthy thresholds, and read what they say about your company’s financial health. All formulas come ready in Excel and Google Sheets, with a worked example in Saudi Riyals for a company with SAR 8.5 million in assets, SAR 3.2 million in loans, and SAR 4 million in equity, so you can apply the numbers directly to your own reality.

What Are Debt Ratios and Why Do Banks and Investors Care

Debt ratios (leverage ratios) are a set of indicators measuring how much a business relies on debt versus its own resources, and its ability to repay financial obligations from operating cash flows. These ratios do not look at the size of profits as much as at the financing structure and its long-term sustainability.

When a Saudi bank reviews a financing request, it is not enough to know that the business is profitable. A company can show profits on the income statement and still carry debt beyond its repayment capacity. The bank needs to know whether profits are sufficient to cover interest and loan installments, and whether equity provides a cushion strong enough to protect creditors if revenues fluctuate.

The Difference Between Debt Ratios and Liquidity Ratios

Liquidity ratios look at the short term: can the business pay its obligations due within 12 months from current assets. Debt ratios look at the full capital structure over the long term and ask a different question: was the decision to finance with debt instead of equity a balanced one.

A business may have excellent liquidity (a current ratio of 2.5, for example) yet still have a very high debt ratio, because it relied on long-term loans to finance fixed assets, leaving monthly installments heavy against operating margin. Proper financial analysis reads both categories together, not one at the expense of the other.

Who Actually Cares About These Ratios

• Commercial banks and development banks: use them in the approval decision, in setting the financing ceiling, and in risk-based pricing.
• Investors and shareholders: look at them to understand the level of risk and how exposed their equity is to bankruptcy risk.
• Suppliers and major customers: request financial statements before opening large trade credit lines, especially in B2B.
• Zakat, Tax and Customs Authority (ZATCA): uses liability items in the zakat base, and any imbalance raises auditor questions.
• Internal management: uses them when deciding on new borrowing, timing dividend distributions, and evaluating expansion decisions.

The Four Main Ratios

While there are dozens of secondary ratios in financial analysis textbooks, in practice mastering four ratios is enough to read your company’s status and understand the bank’s language. These four cover both structural aspects (how much of capital comes from debt) and operational aspects (the ability of profits to cover debt burdens).

Why These Four Specifically

Debt-to-equity and debt-to-assets are two complementary structural ratios: the first looks at the balance sheet from the shareholder’s angle, the second from the angle of total resources. Interest coverage measures the ability of profit to bear interest costs only, while debt service coverage is broader because it includes the original loan principal payments. DSCR is the most important ratio for the Saudi Industrial Development Fund and the Social Development Bank when evaluating feasibility.

What the Template Deliberately Leaves Out

• Long-term debt to capital: useful but a derivative of D/E. Building the template on it would add complexity without real value for a small or mid-sized business.
• Capitalization ratio: used more widely in listed companies, less important for unlisted private firms.
• Liabilities to operating cash flow: very important but requires an audited cash flow statement, and many small businesses do not prepare one monthly.

How to Calculate Each Ratio Step by Step With the Worked Example

The example covers a Saudi company in the wholesale trade sector, with total assets of SAR 8.5 million, loans (long and short term) of SAR 3.2 million, total liabilities of SAR 3.9 million (including loans, payables, and accruals), equity of SAR 4.6 million, annual operating profit (EBIT) of SAR 1.4 million, interest expense of SAR 280,000, depreciation of SAR 320,000, and loan principal installments due within the year of SAR 620,000.

Step 1: Debt-to-Equity

Formula: Total Liabilities / Equity. Here 3,900,000 / 4,600,000 = 0.85. Interpretation: every riyal of equity is matched by 0.85 riyals of debt, which is a very conservative ratio by wholesale trade standards in the Saudi market. If it rose to 1.5 the capital structure would still be acceptable, but exceeding 2.0 starts to worry the bank.

Step 2: Debt-to-Assets

Formula: Total Liabilities / Total Assets. Here 3,900,000 / 8,500,000 = 45.9%. That means 45.9% of the company’s assets are financed by debt, and the rest by equity. This is comfortably below the 60% ceiling used in Saudi commercial lending.

Step 3: Interest Coverage Ratio

Formula: EBIT / Interest Expense. Here 1,400,000 / 280,000 = 5.0 times. Operating profit can cover interest payments five times over, an excellent safety margin. If the figure dropped below 1.5 the company would be in a critical position, because any revenue fluctuation could leave it unable to even cover interest.

Step 4: Debt Service Coverage Ratio

Formula: (EBIT + Depreciation) / (Interest + Principal Installments). Here (1,400,000 + 320,000) / (280,000 + 620,000) = 1,720,000 / 900,000 = 1.91. Operating cash flow covers the full debt service 1.91 times, above the threshold required by banks (1.25) and even above the threshold set by the Saudi Industrial Development Fund for expansion projects (1.5).

Healthy Thresholds for Each Ratio by Sector

There is no single universal ratio that applies to every business. The contracting sector tolerates higher debt due to the long-term nature of projects, while the services sector should carry lighter debt because its revenues are less predictable. The following table summarizes the thresholds Saudi banks actually use when evaluating the four largest sectors.

Why Manufacturing Tolerates Higher Debt

Manufacturing businesses invest in production lines and long-lived fixed assets (10 to 20 years), so it makes sense to finance a large part of these assets with long-term loans. Industrial revenues also fluctuate less than services, since they are tied to supply contracts and stable industrial customers, making repayment ability more predictable.

Why Services Should Stay Light on Debt

Service businesses do not own large fixed assets that can be pledged as collateral. They rely on human capital and contracts. If a major client disappears suddenly or a key team leaves, revenues are hit hard. Banks therefore require lower debt ratios and higher coverage margins before approving financing.

Real Estate Is a Special Case

Real estate tolerates the highest debt ratios because the financed asset (building or land) is itself strong collateral. In case of default, the bank can foreclose and liquidate it. Even so, DSCR does not drop much, because any delay in leasing units cuts off cash flow immediately, while the installment remains due.

How Saudi Banks Use the Ratios in Financing Decisions

Commercial banks licensed by the Saudi Central Bank (SAMA) follow a similar methodology when analyzing creditworthiness for small and mid-sized businesses, even if internal model details differ from bank to bank. This methodology links the four ratios to an internal credit grade, and the grade determines the financing ceiling, interest rate, and collateral requirements.

The Five Credit Grades

• Grade A (Excellent): all ratios above healthy thresholds by at least 30% margin. Financing at SAIBOR plus 1.5 to 2%.
• Grade B (Very Good): all ratios healthy. SAIBOR plus 2 to 3%.
• Grade C (Acceptable): one or two ratios near the minimum. SAIBOR plus 3 to 4.5%, with additional collateral.
• Grade D (Under Watch): one ratio breached. Financing conditional on restructuring and personal or real estate guarantees.
• Grade E (Rejected): two or more ratios breached. Approval is usually not given.

Saudi Industrial Development Fund and Social Development Bank

Government development funds tend to be more lenient on structural ratios (D/E and D/A) because their role is to support productive sectors, but they are stricter on DSCR because they want to make sure the project can repay from its own cash flow rather than from fresh capital injections. The minimum DSCR for Saudi Industrial Development Fund financing is usually 1.5, and on some projects 1.75.

The Hedging Margin

Even if current ratios fall within healthy thresholds, the bank runs a stress test assuming a 15% or 20% revenue drop and recalculates the ratios. If the ratios break under the stressed scenario, the bank will demand higher collateral or lower the financing ceiling. The advice is to keep actual ratios 25 to 30% below the thresholds, not right at them.

How Debt Ratios Relate to Bankruptcy Risk and Creditor Rights

Bankruptcy under the Saudi Bankruptcy Law issued in 1439H usually begins when a business is unable to pay its due debts, not just when it shows losses on the income statement. Debt ratios are therefore an earlier indicator than the income statement, because they expose structural imbalance before it turns into actual payment default.

Structural Indicator vs Operational Indicator

A debt-to-equity ratio above 3.0 does not mean immediate bankruptcy, but it does mean the business depends dangerously on debt, and any small disruption in revenue could destroy its ability to repay. A DSCR below 1.0 is a sharp operational signal: operating cash flow does not cover debt service, and the business is paying from prior reserves or from new loans (a red line).

Order of Creditors in Case of Default

• Secured creditors: those holding a pledge on specific assets (real estate, machinery, vehicles). Recovered from liquidating the pledged asset first.
• Preferred creditors: zakat and taxes owed to the Zakat, Tax and Customs Authority (ZATCA), wages due to employees, social insurance contributions to the General Organization for Social Insurance (GOSI).
• Ordinary creditors: suppliers, banks on unsecured loans, credit lines.
• Shareholders: last in line, and recover nothing until all prior classes have been paid.

This order explains why a bank insists on a pledged asset or personal guarantee, and why equity must be a sufficient cushion. If equity is very thin, ordinary creditors and shareholders may recover nothing in liquidation.

The Difference Between Good Debt and Dangerous Debt

Not all debt is bad. Debt is a legitimate financing tool and in many cases is the smartest financial choice, since the cost of debt after tax shielding is lower than the cost of equity. But there is a clear line between debt that propels a business forward and debt that pushes it over the edge.

Good Debt

• Debt financing a productive asset: a loan to buy new machinery that raises production capacity, or to finance expansion into a new branch backed by a documented feasibility study.
• Debt at a cost lower than the return on the asset: if the interest rate is 6% and the expected return on the asset is 12%, the difference is net gain to the shareholder.
• Debt with a repayment structure matched to the asset’s cash flow: a monthly installment for a machine that generates monthly revenue. Not a semi-annual installment on an asset with volatile income.
• Debt within healthy thresholds: does not break debt ratios and does not consume more than 60% of future borrowing capacity.

Dangerous Debt

• Debt to finance operating losses: a loan to pay salaries or rent for a business losing money every month. This delays collapse, it does not solve it.
• Debt to fund dividend distributions: borrowing to distribute profits that were not actually realized. This drains equity and raises debt at the same time.
• Short-term debt financing a long-term asset: such as buying real estate with a one-year working capital loan. The maturity mismatch creates recurring liquidity crises.
• Debt with interest cost higher than operating margin: meaning every additional riyal of debt reduces profit rather than increasing it.

How to Improve the Ratios

If the template shows that one or more of your ratios is out of range, do not wait until the next bank visit. There are practical paths to improve the ratios over 6 to 12 months, divided into three pillars: reducing the numerator (debt), increasing the denominator (equity or assets), or improving profits.

Debt Restructuring

Restructuring is not just asking for a lower interest rate. It means adjusting the repayment structure to match actual cash flow. For example, converting a short-term loan with large monthly installments into a medium-term loan with smaller installments raises DSCR immediately. Negotiating a 6-month grace period on principal at the start of a new project improves DSCR in the critical first year.

Liquidating Unused Assets

• Stagnant assets: old inventory, broken machinery, surplus vehicles. Selling them converts an unproductive asset into cash that pays down debt.
• Non-core real estate: a surplus office, a partially leased warehouse. Sale and leaseback is a common Saudi option to free liquidity from real estate without losing its use.
• Side investments: financial portfolios or stakes in companies unrelated to the core business.

Capital Increase

Injecting new capital from current shareholders or bringing in a strategic investor raises equity and lowers D/E automatically. In many Saudi Industrial Development Fund cases, a capital increase is required as a precondition for financing at a specified ratio (for example, 30% of the project must be self-funded).

Retaining Profits Instead of Distributing

Retaining profits instead of distributing them gradually raises equity. This is a decision the partners must understand: one or two years of deferred distributions mean a substantial improvement in the ratios and the opening of larger financing doors in the future at lower cost.

Improving Operating Margin

Raising EBIT improves ICR and DSCR directly without changing debt levels. This is done through pricing structure review, cutting unnecessary costs, or ending loss-making product lines. Every riyal added to operating profit improves coverage more than reducing a riyal of debt does.

The Ratios and Their Relation to Zakat Filings and ZATCA Statements

Many businesses are surprised that the debt ratio figures presented in the financial statements submitted to ZATCA are not identical to what the bank calculates. The reason is that the zakat base has specific accounting treatment for certain items, especially related to liabilities.

The Impact of Loans on the Zakat Base

The zakat base in commercial activity deducts loans used to finance zakatable assets under specific conditions (the purpose of the loan, the date obtained, the duration outstanding). If loans are relatively large, the way they are treated in the filing affects the final zakat amount and the picture of the ratios presented to the auditor.

Differences Between Statements Prepared for the Bank vs the Zakat Authority

• Accounting treatment of provisions: provisions for doubtful debts are treated differently for zakat purposes than for the bank’s accounting treatment.
• Long-term assets: strategic investments are excluded from the zakat base but remain in assets for D/A purposes.
• E-invoicing Phase 2: ZATCA’s invoice audits may reveal differences between declared revenues and income statement revenues, which feeds into the EBIT used to calculate ICR.

A well-prepared business keeps two consistent versions of the statements: one for zakat with its specific treatments, and one analytical version showing the actual ratios for the bank and investor. The differences must be justifiable and limited, not contradictions.

Early Warning Indicators That Tell You the Ratios Are Deteriorating

The ratios themselves are lagging indicators by nature, since they are calculated on quarterly or annual financial statements. But there are monthly indicators that can be monitored to catch deterioration before it shows up in the formal ratios. These indicators are the first line of defense.

Operational Signals

• Delayed receivables collection: average collection period (DSO) rises from 45 to 70 days within a quarter. This drains liquidity and pushes the business to increase short-term borrowing.
• Suppliers extending payment terms: the business requests extended payment terms from suppliers, a sign of cash pressure.
• Full use of the working capital line: the bank facility limit is 95%+ utilized for consecutive months.
• Increased financing from credit cards or shareholder personal loans: a sign that the company can no longer secure institutional financing.

Financial Signals

• Operating margin declines for 3 consecutive months: warns of an ICR breach in the next statement.
• Increased provisions for doubtful debts: signals deterioration in receivable quality and affects assets used in D/A.
• Delayed payments to a bank: repeated one or two day delays get recorded with SIMAH (the Saudi Credit Bureau) and raise future financing costs.
• Requests to defer an installment: even if the bank agrees, it remains an internal signal that actual DSCR is below 1.0.

Common Mistakes in Calculating the Ratios

Many of the errors appearing in small and mid-sized business statements are not arithmetic errors in the formula. They are errors in identifying the numerator or denominator. The following are the mistakes that cost businesses rejected financing or unnecessarily higher interest.

Confusing Loans With Total Liabilities

Some accountants calculate D/E by dividing bank loans only by equity, ignoring trade payables, accruals, and provisions. The correct numerator in D/E is total liabilities, because the bank looks at all liabilities on your balance sheet, not just loans.

Using Net Profit Instead of EBIT

The ICR ratio uses EBIT (earnings before interest and taxes), not net profit. Using net profit gives a much lower number and shows an artificially low coverage ratio. The numerator must be EBIT so we measure the pure operating profit’s ability to cover interest before it is deducted.

Ignoring Finance Lease Obligations

IFRS 16 requires recognizing long-term finance leases as a liability on the balance sheet. Many businesses still treat leases as an expense only, hiding a real obligation and showing a D/E lower than reality. When the statement is submitted to the bank, this is detected and held against the company.

Not Including Principal Installments in DSCR

Some templates calculate DSCR by dividing EBITDA by interest only, but the correct denominator includes interest plus principal installments due within the year. Ignoring principal gives an inflated number that does not reflect the actual obligation on cash flow.

Using Period-End Data Instead of Averages

Equity and assets change throughout the year. The more accurate approach is to use averages (beginning plus end of period divided by 2) instead of only end-of-period values, especially in a year that saw a capital increase or large dividend distributions.

How Qoyod Calculates Debt Ratios Automatically From Financial Statements

Manual calculations in Excel work but are error-prone at the start of every month, especially when dealing with several loans with different interest rates and installments. When you link your books to an integrated accounting system, the ratios are calculated automatically from posted entries and appear on a live dashboard, so you do not need to close the month to know your financial position.

What Qoyod Does Directly

• Generates the balance sheet automatically: from daily entries, giving you assets, liabilities, and equity at any moment. Details on the General Accounting page.
• Calculates D/E and D/A in real time: both ratios appear on the owner’s financial indicators dashboard, with comparison to prior periods.
• Tracks EBIT and interest separately: correctly separating operating expenses from finance expenses makes ICR directly computable.
• Loan installment scheduling: loan management in the system gives you the installments due over the next 12 months, the numerator for calculating DSCR.
• Bank-ready reports: financial statements in a format accepted by Saudi banks, printed and submitted directly. For more details see the Financial Reports page.

Integration With Zakat and E-Invoicing Requirements

The system issues the zakat filing in the format approved by ZATCA and integrates with E-invoicing Phase 2 through certified XML. This ensures that revenues in the income statement used in the ratios match exactly the invoices declared to ZATCA, so no discrepancies appear that would alarm the bank or auditor.

Continuous Support

The support team is available 24 hours a day, 7 days a week to help you understand the ratios, interpret variances, and configure your chart of accounts so it produces accurate reports from day one.

Frequently Asked Questions

Does a Debt-to-Equity ratio of 1.5 mean my business is dangerously indebted

Not automatically. A ratio of 1.5 means every riyal of equity is matched by 1.5 riyals of debt, which is within the healthy range for trade and manufacturing sectors and may even be low for real estate. Danger typically starts above 2.0 for most sectors, and above 2.5 for real estate. What matters more than the absolute number is the trend: is the ratio improving or deteriorating over recent quarters.

What is the difference between Interest Coverage and Debt Service Coverage

Interest Coverage measures the ability of operating profit to cover interest only (the current cost of debt). Debt Service Coverage is broader and measures the ability of operating cash flow (EBIT plus depreciation) to cover both interest and principal installments due. DSCR is the more important measure for banks because it reflects the full actual obligation.

How often should I calculate my debt ratios

Monthly for internal monitoring, quarterly for serious review, and annually for bank submissions. Monthly calculation reveals deterioration early, especially for DSCR, which is affected by any change in operating cash flow. An integrated accounting system updates the ratios automatically, so you do not need to recalculate manually.

Are shareholder loans counted as debt or equity

From an accounting standpoint, shareholder loans are classified as a liability. However, Saudi banks evaluating creditworthiness may accept part of them as quasi-equity if they are formally subordinated and not due within the next 3 years. Request a formal subordination agreement so the fixed portion can be counted toward equity.

What ratios specifically does the Saudi Industrial Development Fund require

The Saudi Industrial Development Fund typically requires a DSCR of at least 1.5, a D/E not exceeding 2.0, and a minimum equity contribution of 25% of project cost. Conditions may change by sector and financing size, so check the latest credit guide published on the fund’s official website before applying.

What do I do if my DSCR is below 1.0

A DSCR below 1.0 means operating cash flow is not enough to cover debt service, and you are paying from reserves or new financing. The first step is to freeze any new borrowing, the second is to negotiate with banks for restructuring with a grace period or extended maturity, and the third is to identify the source of the operating profit leak (a loss-making customer, product line, or unproductive expense) and address it within 90 days.

How does a capital increase affect the ratios

A capital increase raises equity in the denominator, so D/E and D/A drop immediately. If the new capital is used to repay loans, the numerator also drops and the improvement is amplified. Example: a business with D/E = 2.0 (debt SAR 8 million, equity SAR 4 million). Injecting SAR 2 million in capital and repaying SAR 2 million of the loan brings D/E to 6 / 6 = 1.0, an improvement of half.

Are good ratios alone enough to secure financing

No. The ratios are a necessary condition but not sufficient. The bank also looks at company age, credit history at SIMAH, management quality, customer profile (diversity and financial strength), the feasibility study of the financed project, and the collateral offered. But bad ratios alone are enough to trigger rejection, even if all other factors are excellent.