Question

What are some factors to consider in evaluating a company's ability to make payments on outstanding debt? Please explain the factors rather than just providing a list.

Answer 1

The following are the factors that which needs to be considered for the purpose of evaluating firm's ability in making debt payments:

1. Liquidity: The firm's liquidity plays a vital role in estimating the paying ability of the firm. This is because liquidity of the firm describes the smooth cash inflow and outflow through its assets,investments and also the financial health of the firm is dependent upon the firm's liquidity. Liquidity is nothing but the ability of the firm in generating the cash that could help it in paying off its liabilities.

2. Solvency: This indicates the firm's existence and sustainability in near by future. Solvency ratios enable in determining the firm's solvency condition.

3. Supplier and Creditor Information: The information about suppliers and creditors of the firm would become a key factor in determining the firm's ability in paying off debt because this factor judges number of suppliers and creditors with whom the firm is tied up in activities of business.

4. Competition : The ability of the firm in sustaining within industry through strategic approaches against the competitive industry determines the going concern concept. Through this factor we could decide its paying ability of debt in foreseeing future.

5. Key Product : The firm's existing products/services and estimated launching products/services would be a key factor in determination of its ability in paying off debt. This is because the product reflection in segment market may impact firm's earnings and payoff abilities.