If we devide users of ratio into short-term lenders, long term leaders, and stoc
ID: 2783375 • Letter: I
Question
If we devide users of ratio into short-term lenders, long term leaders, and stockholders, in which ratios would each group be most interested, and for what reason? Explain in 200-300 words. If we devide users of ratio into short-term lenders, long term leaders, and stockholders, in which ratios would each group be most interested, and for what reason? Explain in 200-300 words. If we devide users of ratio into short-term lenders, long term leaders, and stockholders, in which ratios would each group be most interested, and for what reason? Explain in 200-300 words.Explanation / Answer
Short term lenders are interested in short term financing activities. So they would be interested in how well the company manages its working capital. So they would be particularly interested in the current ratio and the quick ratio. The current ratio is the ratio of the current assets to the current liabilities. The quick ratio is the ratio of the current assets less the inventory to the current liabilities. So they are interested with the liquidity of the business.
The long term lenders would be interested with how well the company is servicing the long term debt. So there are two ratios they would b interested in the debt ratio and the times interest earned. The long term debt ratio is ratio of the long term debt to the total assets of the company. This would let the long term lenders know how exactly the amount of long term debt the company has with respect to assets. The times interest earned ratio is actually the ratio of the earnings before interest and tax to the interest expense. This tells us how the earnings are with respect to interest.
The stock holders would be interested in the ROE (Return on equity) and the P/E ratio. The ROE is the ratio of the net income to the total equity. This will help in investors or stockholders gauge the returns that they could expect from equity. The price to earnings ratio helps them gauge if they are purchasing the stock at a fair price or not.
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