Question

why would a lender be interested in a firms liquidity ratios

what raitos would you be most interested in if you were planning to invest in a firm?

why does the IRS allow firms to depreciate assets?

why do we use ratios to analyze and compare firms instead of just comparing their balance sheets and income statements?

Answer 1

1. Lender is interested in the firm liquidity ratios like current ratio, quick ratio by which they know if the firm is able to pay the short term obligations are not.
2. I will be interested in ratios like return on equity, return on assets and profit margin as these say how efficiently firm generations profits from its assets and equity along with the margin
3. The assets is used to generate the income as the assets life increases its efficiency comes down so the value of asset will not be same so it needs to be depreciated
4. If we want to compare a small company and big company(more revenues and established one) directly will not give any insights and we do ratio analysis then it is like normalizing them and will give proper insights