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3 Cards in this Set
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- Back
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Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain.
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Bankers and other lenders use liquidity ratios to see whether to extend short-term credit to a firm. Liquidity ratios measure the ability of a firm to meet its short-term obligations. These ratios are important because failure to pay such obligations can lead to bankruptcy. Generally, the higher the liquidity ratio, the more able a firm is to pay its short-term obligations.
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Under what circumstances would market to book value ratios be misleading?
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The Market to Book ratio is useful, but it is only a rough approximation of how liquidation and going concern values compare. This is because the Market to Book ratio uses accounting-based book values. The actual liquidation value of a firm is likely to be different than the book value. For instance, the assets of a firm may be worth more or less than the value at which they are currently carried on the company's balance sheet. In addition, the current market price of the company's bonds and preferred stock may also differ from the accounting value of these claims.
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Why are trend analysis and industry comparison important to financial ratio analysis?
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Trend analysis helps financial managers and analysts see whether a company's current financial situation is improving or deteriorating.
ross-sectional analysis, or industry comparison, allows analysts to put the value of a firm's ratios in the context of its industry. |
