Question

Ricardo Rocks (RR) is a public listed manufacturing company and we can calculate financial ratios from its financial statements. What financial ratio(s) would you analyze and why, if you are:

1. A supplier that requires payment of amount due in 2 weeks and looking to extend credits to RR

2. A new investor interested to invest in RR

3. A banker looking to extend a long-term loan to finance RR for a new investment project

Please explain in your own words

Answer 1

1.if I am a supplier which is requiring the payment of amount due in 2 weeks and looking to extend credit then I would be looking for following ratios-

A. I will be looking for the current ratios which will include the total current assets and the current liabilities of the company.

B. I would also look for the quick ratios in order to receive the cash quickly.

C. I would be looking for other liquidity ratios and cash ratio which would be providing me with an idea about the short term liquidity about the company.

D.if I had to issue new credit, then I'll be looking for the solvency ratios of the company which will be debt ratios mostly.

2.if I am a new investor who is interested to invest in the company then I will be looking for various kinds of valuations and discounted cash flows ratios like-

A. I would be looking for Earning per share of the company.

B. I would be also looking for the profit margins of the company.

C. I would be looking for price to earning in respect to growth (PEG) ratio of the company.

D.I would also be looking for debt ratios because the company will have to be sustainable in the long run.

3 if I am a banker who is looking for or extend long term loan then-

A.I will be looking for debt equity ratio because it will be reflecting the solvency of the company.

B. I would also be looking for the interest coverage ratio because it will reflect the ability of the company to pay the interest.

C. I will also be looking for financial leverage and degree of operating leverage.