Question

Imagine you are planning to raise capital for the firm, you are wary about the lender and shareholders, which accounting ratios could address the concerns of those stakeholders? Explain in detail.

Answer 1

In order to assess the strength of the capitalization of the company, the following three ratios can be uses:

1). Debt-to-equity ratio: It is a financial ratio which compares the total debts of the company to the total equity of the company. It is an example of a balance sheet ratio. The higher debt equity ratio is risky to the creditors and investors.

2). Debt ratio: It is an example of a solvency ratio which indicates the total liabilities as a percentage of their total assets. It measures the ability of the company to pay off their liabilities with their assets. This ratio is used for measuring the financial leverage of the company.

3). Capitalization ratio: The capitalization ratio explains to investors the extent to which the company using debt to fund s their operation and expansion plans. It is an example of the solvency ratio.