Which financial ratios would you consider to be most valuable to you if you were

Question

Which financial ratios would you consider to be most valuable to you if you were each of the following? What would they tell you that would assist you to make a prudent decision? What else would you want to know and why?
a. A banker considering financing for seasonal inventory of a retailer
b. A private equity firm considering an investment in an leveraged buy-out of a small public company
c. The investment manager for an insurance company considering the purchase of a firm's bonds.
d. CEO of a consumer products manufacturer assessing the condition of the company.
e. Individual investor considering purchase of the shares of a consumer healthcare products company.

Explanation / Answer

a. Before extending finance the Banker will look into the following ratios to assess the company's performance 1.profit margin: Measures net income generated by each dollar of sales. the formula for this is Netincome/Net sales. 2.Current ratio: This will evaluate a company's liquidity and short term debt paying ability. This ratio is comoputed by dividing current assets by current liabilities. 3.Stock turnover ratio: It measures the number of times , on average the inventory is sold during the period.Its purpose is to measure the liquidity of the inventory. To compute this divide the cost of goods sold by the average inventory. b. When a private equity firm considering investment in an leveraged buy-out of a small public company the following solvency ratios will be taken into consideration to measure the ability of a company to survive over a long period of time. Long term creditors and stockholders are particularly interested in a company's ability to pay interest as it comes due and to repay the face value of debt at maturity. Debt to total assets: it measures the percentage of the total assets that creditors provide.To compute divide the total debt(both current and long term) by total assets. Debt to total assets: Total debt/Total assets Times Interest earned:It provides an indication of the company's ability to meet interest payments as they come due.To compute it divide income before interest and income taxes by interest expenses. Times interest earned: Netincome before interest and taxes/interest expenses c. When a manager of an insurance company considering to purchase of firms's bonds, he has to consider again the times interest earned ratio, as the main purpose to invest in bonds is to get interest promptly. d. When a CEO of a consumer product manufacturer to assess the condition of the company the following ratios are tobe considered 1.Net income ratio,inventory turnover ratio,receivable turnover ratio, current ratio. e.When individual investor considering purchase of the shares of a consumer healthcare products company the following ratios are tobe considered. profit margin rato: Measures the net income generated by each dollar of sales. Return on common stockholder's equity: Measures the profitability of owner,s investment. Earning per share: Measures net income earned on each share of common stock. price earning ratio: Measures the ratio of the market price per share to common to earning per share. Payout ratio: Measures percentage of earnings distributed in the form of cash dividend.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.