Question

In 200 words, What type of ratios are short-term lenders, long-term lenders and stockholders are more interest in? Provide examples of financial ratios. Select one to expand and provide an example

Answer 1

Financial ratios are mostly used for managerial decision making. Financial ratios involves the comparison between different figures from financial statement in order to collect info. About the company's performance. Financial ratio helps in forecasting company's performance in near future so that the decision can be taken accordingly that's why it is an interpretation rather than just a calculation that makes financial ratio a strong tool for users and managers to make business decision.  Let us see the ratio in which they are interested in.

Short term lenders - They are mostly helpful for small scale business and start ups that are not eligible for the credit from commercial banks they are term short termed because they provide loan for a shorter period and they must be paid off within a year. The ratio they are interested in is Liquidity ratio because their main concern is the firm's ability to pay short term obligation as they become due.

Long term lenders- Their credit period is more than a year. They provide loans to big business houses. The ratio they are interested in  LEVERAGE RATIO because they are concerned with the debt and asset of the company

Stockholders- They are the one who holds one or more shares in a company and in whose name share certificate has been issued, they are also termed as shareholders of a company. The ratio they are interested in is profitability ratio because they are concerned with the profit and return on their investment of the company because they are the ultimate owners of the company who have invested in the company.

Ratio examples-:

Short term lenders- Current ratio and quick ratio

Long term lenders- Debt to asset ratio and Debt to Equitt ratio

Stockholders- Return on equity and return on Total assets

What is current ratio?

It helps short term lenders to compare current assets and current liabilities of the firm. It indicates the extent to which the claims of the short term creditors are covered by the assets that are expected to be converted into cash  within in a year.

Current ratio= current assets/current liablities

Current assets include- cash, debtors, marketable securities and inventory

Current liabilities- accounts payable and short term loans