Financial health is a key part of creditworthiness. It’s also great for gauging solvency and cash flow. There are ways to assess creditworthiness, such as by using financial ratios.
Dina is a business owner looking for additional finance. She is wondering why her application is taking so long to be approved by her bank.
What she doesn’t realise is that the analysis process can take some time, because of techniques involved.
These ratios provide a lens into functioning in terms of finances. Used to analyse trends, they can be a good way of predicting behaviour.
They provide a quantitative overview of financial health of credit applicants. They simplify decision-making processes for lenders.
More about the use of key ratios to analyse creditworthiness:
There are key ratios to analyse creditworthiness helping to make the process significantly more efficient.
Analysts would rely on liquidity ratios to work out the ability of Dina’s company to pay its short term debts off. These ratios, such as the Acid Test, give true reflections of the state of affairs in Dina’s business, in the financial sense.
The Gearing ratio is useful for indicating the extent to which her business’ activities are funded by her own money, compared to using funds from creditors. It’s a good indicator of solvency. For a credit provider, it offers a glimpse into how much an organisation relies on credit.
Generally compiled by using financial statements, they can also be used to compare to other peer organisations.
Dina should factor in that this can be a great way of assessing potential risk. As a business owner she must remember that credit providers want to protect their interests.