Banks make use of credit scores to evaluate loans that are applied by investors. However, these scores are not depicted in trades. Enterprises that ought to borrow cash use different ratios that are calculated via financial statements. The significance of financial ratios is that they enable borrowers to access details. They measure whether the trade has the ability to pay back the loans.
The current ratios contrasts the sum incorporated in present liabilities and assets. The current ratio enables the firm to use its assets to analyze it ability to meet responsibilities that are short term. A bank will also be able to offer a loan award to indicate the current assets and their worth. In finance, quick ratio is commonly known as acid test (Demonstratingvalue.org, 2014, p. 1). This ratio is found by subtracting accounts from present assets and dividing the result by present liabilities.
Through quick ratio, the bank is in a position to determine if a business will be able to service a loan in a reliable manner. In order to operate ratios that are involved in cash flow, there is need to inform the lender on ways to generate the revenue. In this case, a bank will need cash flow ratios to determine sources of the receivables. Operating cash flow is vital to banks because they aid investors to access loans. This further aid the bank to get the right details in relation to income sources and receivables.
Debt to equity is another form of financial ratio. In this regard, the bank has to assess debt to equity ratios before issuing loans. The lender will also access details on how the company finances its projects. At the point when debt to equity ratio is high, it will hinder a business to grow and achieve its goals.
Demonstratingvalue.org. (2014). Financial ratio analysis | demonstrating value. [Online] Retrieved from: http://www.demonstratingvalue.org/resources/financial-ratio-analysis [Accessed: 14 Jan 2014].
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