Question

You should have a basic knowledge of how a ratio is used both personally and professionally. If you have ever applied for a credit card or a loan, you have had your credit profile reviewed and you had to tell the organization how much money you made. They then used this information to perform a ratio to determine if you qualify for the loan. The lender wants to know if you can afford the loan.

This same principal is applied to businesses. The financial information can be obtained from a health care organization by reviewing their financial statements, which can tell a lender if the organization is making enough money to take on the debt associated with a loan.

Discussion Question:

Financial institutions and investors utilize ratios to determine the financial viability of a business. Therefore, it is important for a manager to understand the use and calculation of ratios. In you initial response, include Part 1 and Part 2:

PART 1:

Based on the first initial of your last name, you will discuss one of the financial ratios listed below and explain why a financial institution or investor would use the ratio you chose. Include what the ratio results would tell you about the business.

RATIOS

Current Ratio (Liquidity Ratio)

PART 2:

In addition, give an example of how you would you use one of the financial ratios in your personal finances.

Make sure your initial response is at least a 175- to 265-word count.

APA Formatting: Use citations where appropriate and list the associated references. All citations and references, if used, must be in APA format.

Answer 1

To know the creditworthiness of the business financial institutions and investors use ratios to find out whether the company will be able to pay the debt or not. And investors use such ratios to assess the performance of the company and also to assess the financial soundness of the company. Therefore the manager also need to understand how to use and calculate the ratios so that he would know how his company will be assessed by the investors and financial institutions . Let us take an exmaple of current ratio

Current ratio is measured as a ratio of the current assets and current liabilities of the company. It is measured to know the short term solvency position of the company.

A financial institution or an investor would use this ratio to know whether a company will be able to meet its short term obligations. Financial institution is interested in know whether the interest payments, overdraft repayment, cash credits etc forwarded to the company will be paid in time or not. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.

Also to manage personal finances we can use the ratios. We can use the ratios to make the investments. We also have liabilities in the form of loans and EMIs that we need to pay in time. We can know our position of the debts by using the ratios and assess whether more money can be taken as a loan or not or we should go for investments. It helps in decision making and reducing our obligations to pay others.