Reply 2 to discussion (Financial Statement Analysis)

Hello dear

Based on the attached discussion, kindly Prepare a reply to the attached discussion post with comments that further and advance the topic.

Please provide the references you used.

Word limit: 200 words.

Financial ratios play a pivotal role in the assessment of a company’s financial well-being and performance
(Gitman & Zutter, 2019). The interests and concerns of creditors and investors can vary significantly when
they scrutinize financial statements, depending on their specific roles within the organization. In this post,
we will delve into three distinct financial ratios that hold particular significance for various types of
creditors and investors as they evaluate a company’s financial statements.
Relevant Financial Ratios
1. Vendor (Supplier of Goods or Products)
Vendors are keen on appraising a company’s ability to promptly settle its outstanding financial obligations
(Horngren et al., 2018). The ensuing financial ratios are of notable importance to vendors:
a. Current Ratio: The current ratio, calculated by dividing current assets by current liabilities, serves as
an indicator of a company’s short-term liquidity and its capacity to meet its imminent obligations (Brigham
& Houston, 2018). A higher current ratio signifies a superior ability to meet financial commitments on time,
which is pivotal for vendors to ensure they receive timely payments for the goods and services they
provide.
b. Accounts Payable Turnover Ratio: This ratio measures the speed at which a company settles its
outstanding invoices with vendors (Ross et al., 2019). A high accounts payable turnover ratio indicates
that a company efficiently manages its payment of bills, which provides reassurance to vendors.
2. Bank Providing Long-term Loans (10 years or more)
Banks that offer long-term loans are chiefly concerned with assessing the financial stability of borrowers
and their ability to service loans over extended periods (Gitman & Zutter, 2019). The subsequent financial
ratios hold significant importance for such creditors:
a. Debt-to-Equity Ratio: The debt-to-equity ratio, determined by dividing total debt by total equity,
reveals the extent to which a company relies on borrowed capital (Brigham & Houston, 2018). A lower
debt-to-equity ratio indicates reduced financial risk and suggests a heightened capacity to repay longterm loans, which is reassuring for long-term creditors such as banks.
b. Interest Coverage Ratio: The interest coverage ratio, obtained by dividing earnings before interest
and taxes by interest expenses, mirrors a company’s capability to meet its interest payment obligations
(Ross et al., 2019). A higher interest coverage ratio demonstrates a lower risk of default on interest
payments, which is pivotal for long-term creditors as it guarantees a stable cash flow for servicing loans.
3. Bond Investor
Bond investors are chiefly concerned with safeguarding their investments and ensuring the timely receipt
of interest and principal payments as stipulated (Horngren et al., 2018). The ensuing financial ratios carry
great significance for bond investors:
a. Debt Ratio: The debt ratio, determined by dividing total debt by total assets, quantifies the proportion
of a company’s assets funded through debt (Gitman & Zutter, 2019). Bond investors typically prefer a
lower debt ratio, as it indicates a reduced risk of default on bond payments.
b. Cash Flow to Debt Ratio: This ratio, calculated by dividing operating cash flow by total debt, evaluates
a company’s ability to generate adequate cash flow to service its debt obligations (Brigham & Houston,
2018). Bond investors seek a robust cash flow to debt ratio to ensure the company can meet its bondrelated obligations.
By considering these specific financial ratios, creditors and investors can make informed decisions
tailored to their unique concerns and interests within the financial landscape.
References:
Gitman, L. J., & Zutter, C. J. (2019). Principles of managerial finance. Pearson.
Brigham, E. F., & Houston, J. F. (2018). Fundamentals of financial management. Cengage Learning.
Horngren, C. T., Sundem, G. L., Schatzberg, J. O., & Burgstahler, D. (2018). Introduction to management
accounting. Pearson.
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of corporate finance. McGraw-Hill
Education.