ACT500 Managerial Accounting

ACT500: Managerial Accounting

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My choice of creditor is a bank providing long-term loan. Financial ratios are very important tools which help in quantitative analysis. Some of the ratios help in the evaluation of both the long term and short-term operational and financial performance. These help in the identification of the trends in business and thus help to notice the warning signs early enough. These ratios help the creditor to be able to assess the financial capability of an organization before a loan can be handed out. Some of the ratios are discussed below.

Liquidity Ratios

These are designed to give an indication of the ability of the company to manage any short term financial obligations. The calculation of the ratio is done by carrying out a comparison of the liquidity assets of the company against the liabilities which can be termed as short term. High coverage shows that the company is able to handle short term debts. The lower coverage shows that the company has limited ability to handle short term debts (Barnes, 1987). The creditor needs to know this information as they will assess the organization’s ability to handle short term goals thus showing that they can be able to handle long term goals.

Leverage Ratios

According to Korteweg, (2010), these ratios indicate the health of the business in the long-term basis. They have a primary role of indicating the amount of capital that results from debt. They give the determination of the company’s ability to meets its financial needs in the long-term. They give an illustration of the way the company depends on several equity and debt in order for them to maintain operations. With this, the creditor will be able to understand the amount of debt that the company has and make an assessment of whether their client will be able to handle the loan or not.

Profitability ratios

They give an indication of the ability of the company to generate their earnings as compared to the cost over a specific period of time. These ratios give a revelation of the way the company is making use of its assets for them to be able to generate profit. These ratios are used to make determination of the profitability of a company over two different periods. This can be monthly, quarter or yearly.

References

Barnes, P. (1987). The analysis and use of financial ratios: A review article. Journal of Business Finance & Accounting, 14(4), 449-461.

Korteweg, A. (2010). The net benefits to leverage. The Journal of Finance, 65(6), 2137-2170.