Question

In which ratios would a potential long-term bond investor be most interested? Explain.

Answer 1

Current and potential lenders of long term funds such as banks and bondholders are interested in debt ratios. When a business's debt ratios increase significantly, bondholder and lender risk increases because more creditors compete for that firms resources if the company runs into financial trouble

The debt ratio compares a company's total debt to it's total assets which is used to gain a general idea as to the amount if leverage being used by a company. A low percentage means that the company is less dependent on leverage. i.e. money borrowed from and /or owed to others the lower the percentage the less leverage a company is using and the stronger it's position. In general the higher the ratio, the more risk that company is considered to have taken on

Debt ratio = total liabilities / total assets