Question

Question 8: 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

Answer 1

Q1:

In case for a supplier who is planning to lend to RR and repayment in 2 weeks, he should looke the liquidity ratios like Current ratio, Quick ratio, or cashratio to understand can the firm has enough current assets to payback the debt. Similary he can also check Accounts payables turnover days to understand within how much days the firm is paying back its creditors. (in this case 2 weeks)

Q2:

For an investor, he can check valuation as well as profitability ratios. Valuation ratios like Return on Equity, Earnings per share, P/E etc are very much important while investing. Similarly profitablity ratios like profit margin, operating margin etc will give the investor a fair idea about the future profit making potetial of company compared to its peers

Q3:

A banker should check the leverage ratio to check if the firm will be able to pay its debt and interest from the cashflows.

He need to check interest coverage ratio (EBIT/interest expense) , Debt service coverage ratio(DSCR) and current Debt/Equity ratio of the firm. Interest coverage ratio is used to check through the companys operation whether the firm can payback its interest expense or not. Similarly DSCR is checked for interest & principal amount. Debt/Equity ratio shows the current level of debt of the firm compared to its assets.