You work for a supplier that sells furniture to retailers.Company B is a customer and...

You work for a supplier that sells furniture to retailers. Company B is a customer and your company has extended them trade credit (made them a loan.) You are concerned that Company B may default. Their inventory does not seem to be selling, and they do not appear to have a lot of other assets that they can sell to pay back their debt to your company. You decide that the best ratio to address the question is the ______________

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Expert Solution

The best ratio to check whether the company will be able to pay its current liabilities on time is Current ratio.

Current ratio is part of liquidity ratio. Liquidity measures how quickly a company can repay its debts. They also show how quickly and easily a company is in generating cash to repay creditors quickly, either in an emergency situation or in the course of normal business.

The current ratio measures company's ability to generate cash to meet its short-term financial commitments (current liabilities) on time.

Current assets includes cash, inventory, accounts receivables, etc and current liabilities includes creditors, accounts payables, etc.

As a supplier, one needs to check the the profitability ratio, Inventory turnover ratio and creditors turnover ratio also.

Creditors turnover ratio or accounts payable turnover ratio is also a important ratio to be considered. It is a ratio that measures the speed with which a company pays its suppliers. If the turnover ratio declines from one period to the next, this indicates that the company is paying its suppliers more slowly.

jeff jeffy answered 2 years ago

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