Question

if you were an investor or a bank about to give a loan to an organization, how would you determine if their financial statements were accurately portraying their finances? What is a step an investor can do to ensure accuracy of the reported financial status?

Answer 1

Answer: Before giving to loan to an organization, the main through an investor or bank have in mind that, will the organization able to return or pay the desired interest along with the principle. To convince themself they Management ability and approach, past performance and future plans, reputation, market reach.

The above mention is the general term which bank or investor checks to evaluate primary application. However, Bank or Investor manager relies on the majorly following ratios-

1-Debt-to-Equity Ratio

The debt-to-equity ratio allows lenders to compare the assets of a company with its debt. All else equal, lenders consider companies with a high ratio of debt to equity as a higher risk than companies with little or no debt. To calculate a debt-to-equity ratio, get a recent balance sheet, and divide the company's total liabilities by its shareholder's equity. For example, a company with $200,000 in liabilities and $400,000 in assets has a debt-to-equity ratio of 0.5.

2-Operating Margin

An operating margin expresses the profit a company makes as a percentage of its total sales. This helps separate the gross revenue of a company and its net profit, which gives a measure of a company's efficiency. Calculate the operating margin by dividing income from operations by net revenues. For example, a company with a yearly profit of $1 million from $100 million in sales, has an operating margin of 1 percent.

3-Current Ratio

The current ratio is a liquidity ratio that measures the ability to pay for expenses by expressing the number of times assets exceed liabilities. This is similar to the debt-to-equity ratio, although in this case, instead of dividing liabilities by shareholder's equity, you must divide total assets by total liabilities. For instance, if a company has $200,000 in liabilities and $400,000 in assets, it has a current ratio of 2.

4-Inventory Ratio

A company's purchasing and production efficiency can be measured using the inventory ratio. This tells investors how many times a business sells its inventory in a period of time. Divide the cost of the products or services sold by the cost of the entire inventory. The higher the ratio, the more efficient the company is at turning over its inventory, and lenders are more likely to consider it a productive and successful business. For example, if a company had $500,000 in sales and the dollar value of its inventory is $100,000, it has an inventory ratio of 5-to-1.

Above are the criteria to give loans to the organisation by an investor or banks.