Select One Type Of Creditor Or Investor From The List Below

Select One Type Of Creditor Or Investor From The List Below

Select one type of creditor or investor from the list below: vendor (supplier of goods or products), bank providing short-term financing, bank providing long-term loan (10 years or more), bond investor, investor in common stock. Discuss at least three specific financial ratios that creditors or investors would be most interested in when analyzing financial statements, and why. Embed course material concepts, principles, and theories (requires supporting citations) along with at least one scholarly, peer-reviewed reference in supporting your answer.

You are required to reply to at least two peer discussion question post answers to this weekly discussion question and/or your instructor’s response to your posting. These post replies need to be substantial and constructive in nature. They should add to the content of the post and evaluate or analyze that post answer. Answering all course questions is also required.

Required: Chapter 16 in Managerial Accounting Ding, K., Peng, X., & Wang, Y. (2019). A machine learning-based peer selection method with financial ratios. Accounting Horizons, 33(3), 75–87. Corporate Finance Institute ( ). Analysis of financial statements: Guide to analyzing financial statements for financial analysts.

Paper For Above instruction

In financial analysis, the focus on specific ratios is crucial for creditors and investors as these metrics offer insights into a company's financial health, operational efficiency, and profitability. When selecting a particular creditor or investor category, such as a bond investor, understanding which ratios are most relevant provides a clear depiction of the company’s capacity to meet its obligations and grow sustainably.

For a bond investor, three vital financial ratios include the debt-to-equity ratio, interest coverage ratio, and the current ratio. The debt-to-equity ratio indicates the company's leverage and financial structure by comparing its total liabilities to shareholders' equity. A high ratio suggests increased risk as the company is heavily financed through debt, which could threaten bondholders if the company faces downturns (Brigham & Ehrhardt, 2019). The interest coverage ratio measures the company's ability to pay interest expenses from its earnings before interest and taxes (EBIT). A higher ratio indicates a robust capacity to service debt, instilling confidence among bondholders regarding timely interest payments (Higgins, 2018). Lastly, the current ratio evaluates liquidity by comparing current assets to current liabilities. Adequate liquidity ensures the company can meet short-term obligations, reducing default risk for bondholders (Khan & Jain, 2019).

From the perspective of a shareholder, ratios such as return on equity (ROE), earnings per share (EPS), and price-to-earnings (P/E) ratio are particularly significant. ROE measures profitability relative to shareholders' equity, revealing how effectively the company utilizes investors' capital to generate profits (Brigham & Houston, 2019). A high ROE often attracts investors seeking superior returns. EPS indicates the portion of a company's profit attributable to each share outstanding, offering a per-share profitability perspective which influences stock prices (Higgins, 2018). The P/E ratio then compares the company's current share price to its earnings per share, helping investors assess whether the stock is overvalued or undervalued relative to its earnings potential (Khan & Jain, 2019).

For a bank providing short-term or long-term financing, liquidity ratios like the quick ratio (acid-test ratio), net working capital, and the cash ratio are particularly relevant. The quick ratio assesses a company's ability to meet short-term obligations with its most liquid assets, excluding inventory, which is less liquid. This ratio provides a conservative view of liquidity, critical for banks concerned with immediate repayment capacity (Ding, Peng & Wang, 2019). Net working capital, calculated as current assets minus current liabilities, indicates the firm's short-term financial health and operational efficiency, directly impacting the bank’s assessment of the borrower's creditworthiness. The cash ratio further emphasizes liquidity by focusing solely on cash and cash equivalents, offering a stringent measure of immediate liquidity (Khan & Jain, 2019).

Lastly, for a vendor or supplier, ratios such as the receivables turnover, inventory turnover, and days sales outstanding (DSO) are essential. These ratios help assess the company's efficiency in managing receivables and inventory, which directly impacts cash flow and the vendor’s risk exposure. High receivables and inventory turnover ratios imply efficient collection and inventory management, reducing the risk of cash shortfalls (Brigham & Ehrhardt, 2019). Additionally, DSO measures the average number of days it takes for a company to collect receivables, with shorter durations indicating quicker cash inflows, enhancing supplier confidence (Higgins, 2018).

In conclusion, different stakeholders focus on various financial ratios that best predict their risk exposure and investment or lending capacity. A bondholder emphasizes leverage, liquidity, and debt servicing abilities, while equity investors prioritize profitability and valuation metrics. Short-term lenders and vendors focus on liquidity and operational efficiency. Embedding principles from managerial and financial accounting (Ding, Peng & Wang, 2019; Brigham & Ehrhardt, 2019), these ratios serve as vital tools for analyzing financial statements and making informed credit or investment decisions.

References

• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
• Ding, K., Peng, X., & Wang, Y. (2019). A machine learning-based peer selection method with financial ratios. Accounting Horizons, 33(3), 75–87.
• Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
• Khan, M. Y., & Jain, P. K. (2019). Financial Management. McGraw-Hill Education.