Which financial ratio is of the greatest concern to creditors

Expert Solution

A financial ratio is the value of two selected numerical values taken from an enterprise statements. These ratios help in evaluating the overall financial conditions of an organisation or an enterprise.

Long term creditors would be interested in solvency ratio. Solvency ratio is defined as a company's ability to satisfy it's long term obligation. The three critical solvency ratios are:

1. Debt ratio

Debt ratio= Total liabilities/ total assets

Debt ratio is a financial ratio that indicates the percentage of company's assets that are provided via debt i.e ratio of total debt and total assets.

It shows company's assets which are financed through debt. If the ratio is less than 0.5, company assets are financed through equity. If ratio is more than 0.5 ,then company assets are financed through debt.

Higher debt ratio indicates greater risk with firm operations. It also implies low borrowing capacity which will lower firms financial flexibility.

2. Debt to equity ratio

Debt to equity ratio= short term debt+ long term debt+other fixed payment/ shareholders equity

A debt equity ratio indicates the relative proportion of shareholders equity and debt used to finance company's assets.

A good debit equity ratio is around 1-1.5. It depends on industry as some use more debt financing than others.

3. Times interest earned ratio

Times interest earned ratio= Earning before Interest and Tax / interest expense

Times interest earned ratio is a measure of a company's ability to honour it's debt payment. A higher ratio means that risk is less and company is in a better position in terms of solvency. Interest rate greater than 2.5 is an acceptable risk.

jeff jeffy answered 1 year ago

Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What is...

Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Financial ratio analysis is conducted by managers, equity investors, long term creditors, and short-term creditors. What...

Financial ratio analysis is conducted by managers, equity investors, long term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Discuss a financial ratio, its primary users (i.e., management, creditors, investors, etc.) and what the financial...

Discuss a financial ratio, its primary users (i.e., management, creditors, investors, etc.) and what the financial ratio indicates

Financial Statement Analysis, specifically Ratio Analysis is often performed by managers, investors, and creditors.

Financial Statement Analysis, specifically Ratio Analysis is often performed by managers, investors, and creditors. What is the primary goal of each of these groups when evaluating ratios?

-Which financial statement, or statements, would be of most interest to creditors? 200 words

Describe the debt to equity ratio and explain how creditors/owners can use this ratio to evaluate...

Describe the debt to equity ratio and explain how creditors/owners can use this ratio to evaluate risk. Is it more advantageous to issue bonds or obtain financing? Defend your position.

Describe and discuss ethical challenges of greatest concern to IT professionals (individual, organization, profession)

Which ratios or computations would be most important to: (and explain why) -Creditors and prospective creditors:...

Which ratios or computations would be most important to: (and explain why) -Creditors and prospective creditors: -Stockholders and prospective investors: -Management and the Board of Directors:

"Creditors and investors depend on financial account information in order to access the financial state of...

"Creditors and investors depend on financial account information in order to access the financial state of a company. This information is needed in order for external parties to make critical decisions as to their involvement with a company. Through tools such as balance sheets a more detailed report of the companies assets and liabilities can be discovered. Accounting statements can be considered by past or present or both perspectives. A companies past may not be of interest to external parties...

Ratio analysis is an important tool used by investors, creditors, and management when assessing the health...

Ratio analysis is an important tool used by investors, creditors, and management when assessing the health of a company. However, ratio analysis has some problems and issues. What do you think are the problems and issues you must be aware of when conducting ratio analysis? What are the key ratios a creditor would investigate, and why?

Question