Question

After viewing the web link relating to financial statement ratios, answer the following: Which financial statement ratio do you think is the most valuable to evaluate a company and why?

please typing do not write by hand I cannot read pleas

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Answer 1

Although there are many important financial statement ratios, in my opinion, if one ratio is to be selected I would choose the Debt To Equity Ratio. Ratios are used by different types of interested parties for evaluating a company such as investors, lenders, analysts, businesses interested in buying a stake. If there is one ratio that every one invariably considers in evaluating a company is the Debt To Equity Ratio. Debt To Equity Ratio indicates the proportion of equity and debt used by a company in financing its assets. It is calculated by dividing the total liabilities by stockholders’ equity.

The reason for my considering Debt To Equity Ratio as most important financial statement ratio are as below:

1.  As debt-to-equity ratio compares a company’s debt with its net worth, it is a major barometer of a company's financial health and the risk associated with its capital structure. Companies often use debt as a means of leveraging their assets. If a company has a high Debt To Equity Ratio, it will indicate a high risk which means that the company has been aggressively financing its growth with debt. The risk arises from the fact that the cost of debt i.e. interest has to be paid before there can be a profit. If the cost of debt is high, even a small downcycle in the business of the company can push the the company into losses. The history of the corporate world is replete with instances where companies gad to either file bankruptcies or were compulsorily bankrupted by courts due to their inability to pay their debts. Hence, the Debt To Equity Ratio is the most important ratio that every interested party must consider in evaluating a company.

2. Debt To Equity Ratio also provides indication about the credit trustworthiness of a company. If Debt To Equity Ratio is high it means that the company is unable to finance its operations through its own resources and is dependent on debt for running its activities. A very high Debt To Equity Ratio is a signal that the operations of a company could have to be stopped or curtailed due to its inability of raising more loans for running its operations.

3. In an indirect manner, Debt To Equity Ratio also gives an indication about the liquidity position of a company. A high debt to equity ratio means that the company has low liquidity which is a warning signal for the investors and lenders alike. A very high Debt To Equity Ratio is an alarming signal of the cash crunch that the company could face in the near future.