Let’s say, you are a credit officer working for a local bank in Malaysia. 

Aaron, a potential client contacted you as he intends to obtain a mortgage from your bank. Upon your request, he presented his documents such as his pay slip, bank statement, credit card statement, EPF statement, tax files, and his car loan statement. So, how will you assess his mortgage application? 

2 Things Bankers Will Be Looking At 

As a credit officer, you would find out what type of debt Aaron has and from his debt, you will be looking at: 

1. Debt Repayment Behaviour 

Has Aaron been paying his loan installments promptly? 

To put it simply, you will want Aaron to be your customer, if he services his debt installments promptly without fail. You may not like him as a customer, if he is a person who makes irregular debt repayments or fails to service his current debt installments. 

This is why you will check Aaron’s CCRIS report to find out about his behaviour. 

2. Debt Service Ratio (DSR) 

How much can Aaron borrow from your bank? 

Okay, so let’s say, your bank has set a credit policy to limit each individual’s DSR at 60% of his or her monthly income. From Aaron’s documents, you discovered the following: 

a. Aaron earns a monthly salary of RM 7,000 from his current employment. 

b. He is paying a total debt installment of RM 1,000 a month. 

c. Aaron intends to borrow RM 450,000 in mortgage. 

d. His mortgage installment works out to be RM 1,800 a month. 

As a credit officer, you will calculate Aaron’s new DSR, after he has obtained the mortgage from your bank, to assess if he is capable of servicing the mortgage. The computation is as follows: 

Aaron’s New DSR 

= (Existing Debt Installment + New Debt Installment) / Monthly Income x 100%

= (RM 1,000 + RM 1,800) / RM 7,000 x 100% 

= RM 2,800 / RM 7,000 x 100% 

= 40% (within the 60% capping as set by the credit policy of your bank). 

Thus, if Aaron has shown excellent debt repayment behaviour, you will approve his mortgage application. 

What is the Debt Service Ratio (DSR) of Your Stock? 

Personally, investing is, in many ways, kind of like lending money. 

If bankers are required to follow a strict set of SOPs as explained above to really filter out good potential borrowers like Aaron from the others, how about us as investors? 

Do we have our own SOPs when investing? 

Understandably, many are unaware of the need of having SOPs, when investing in stocks. This explains why stocks are risky as they buy them without SOPs. 

Just like a banker, assessing a stock’s debt level (before investing) is a part of my SOP when investing. If a banker checks on debt repayment behaviour, I’ll assess a stock’s ability to generate operating cash flows for the last 10 years (cash flow pattern). Then, I would compare the stock’s operating cash flow with its current debt level to determine its ability to pay off its non-current liabilities. 

Case Study: Ajinomoto (M) Bhd 

First, let’s take a look at its operating cash flows for the last 10 years:

I learnt that Ajinomoto (M) Bhd had recorded positive and rising operating cash flows for the last 10 years. 

Based on its latest quarterly report (Q3 2021), Ajinomoto (M) Bhd had reported RM 79.4 million in non-current liabilities.

So, the question is this: 

‘If Ajinomoto (M) Bhd is able to maintain its operating cash flows at around RM 60-70 million per annum, how long does it take for the company to settle in full all of its non-current liabilities, amounting RM 79.4 million?’ 

The answer is 1+ year. 


Likewise, I’ll leave you with three homework: 

1. Improve Your Debt Repayment Behaviour 

Make sure that you service your debt installments promptly. You will raise or be improving your chances for getting your next loan application approved by your banker if your credit score is good. 

2. Maintain a Healthy Debt Service Ratio (DSR) 

Calculate your current DSR. Is it below 30% or a lot more than 30% presently? 

If you have well above 40% in DSR, I would say it is better for you to aim to earn more money in order to lower down your DSR to 30%, which is optimum. 

3. Assess the Debt Level of Your Stocks

Check out two things for all your stocks in your portfolio currently. 

First, do they generate positive operating cash flows for the last 10 years? 

Second, how long does it take for them to pay off their non-current liabilities? 


The above are exercises to help you familiarise with the calculation of DSR. As it takes more than one ratio to make an assessment on a stock deal, do not make any investment decision only based on a stock’s DSR. 

If you have any questions in regards to the homework given, you may post your questions via replying to this email: ian@kclau.com

Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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