Users of financial ratios
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If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, why?
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The solution lists the ratios that would interest short-term lenders, long-term lenders and stockholders and explains why such is the case.
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If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, why?
Use has been made of material at http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page38.htm for answering this question
1) Short term lenders: They would be most interested in Liquidity ratios.
The most common liquidity ratios are the current ratio , quick ratio and cash ratio.
a) Current Ratio = Total current assets/Total current liabilities
The current ratio answers the question, "Does the business have enough current assets to meet the payment schedule of current liabilities, with a margin of safety?"
There is usually very little uncertainty about the amount of debts that are due, but there can be considerable doubt about the quality of accounts receivable or the cash value of inventory. That's why a safety margin is needed.
b) Quick Ratio adjusts current assets by removing less liquid assets
Quick Ratio = (Current Assets - Inventory)/Current Liabilities
c) Cash ratio relates cash (ultimate liquid asset) to current liabilities
Cash ratio = (Cash + Marketable securities) / Current Liabilities
Liquidity refers to the ability of a firm to meet its short-term financial obligations ...
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