Question

Out of current ratio, quick ratio, debt-to-equity ratio, rate-earned-on-stockholders'-equity ratio, rate-earned-on-total-assets ratio:

1. Which ratio is most important to look at when potentially investing in a company as a stockholder and why?

2. If you are a new supplier, which ratio would you be most interested in to decide to sell your merchandise? Why? Assume your terms for payment are 2/10; net/30.

3. Assume you are a banker and a corporation has met with you to borrow $100,000 and pay it back in three years. Which ratio would you be most interested in to decide to give them the loan? Why?

Answer 1

1. Rate earned shareholder equity ratio is most important when potentially investing in a company as a stockholder.This is because the ratio gives information on returns on the amount invested by equity holders only.The ratio is equal to net income by equity.This ratio measures efficiency of returns to shareholders after debt and other obligations are paid.

2. Quick Ratio is the most important ratio for a supplier because it does not include inventory in its calculation and also measures liquidity of a firm and its ability to pay off its short term obligations. Higher the quick ratio more favorable its is to the supplier.


3. Debt to equity ratio is most important for a banker because it measures the leverage or risk in a company. It debt equity ratio is very high then the repaying capacity of the company is very less. Moreover the chances of default also increases.