Question by Munch_101: Credit analysis? Can anyone provide different ways in which management can window-dress the financial statements in an attempt to improve the appearance of its current financial position as reflected in thecurrent and quick ratios? Best answer for Credit analysis?:
Answer by Santa Barbara
Yes, cut the capital expenditure projections and the reserves and put them into cash.
Answer by SAWGIRL
determining a companies financial position using the quick ratio method gives a ratio that can be compared to the standard industry rate. it is based on the liquidity of the companies assets It doesn't allow scrutiny of the state of the assets the current assets may be tied up in slow moving inventory, work in process and companies may be using different inventory valuation methods It may suggest a strong financial position, when in fact most assets considered liquid-able are not.
Hedge fund manager Jamil Baz from GLG Partners claims the western world's deleveraging, or debt reduction, process could take another 15 to 20 years if the ratio of economy-wide debts to gross domestic product (GDP) in the United States and Europe is ... Analysis: From a credit swamp, recovery horizons lengthen
Ratios are among the most popular and widely used tools of financial analysis. However, their functions are often misunderstood and consequently their significance often overrated. Ratios express a mathematical relationship between two quantities.
Ratios are tools providing with us clues and symptoms underlying various conditions. Ratios, properly interpreted, identify areas requiring further investigation. Analysis of a ratio reveals important relationship and forms a basis for comparison in uncovering conditions and trends the detection of which are found to be difficult.
Ratios, like other analytic tools, are oriented towards future and we must adjust the factors affecting a ratio for their probable future trend and magnitude. Consequently, the usefulness of ratios depends upon the skilled interpretations of them and it is the most challenging aspect of ratio analysis.
Beyond any internal operating conditions affecting the company's ratios, we should be aware of the efforts of economic events, industry factors, management policies and accounting methods.
Prior to computing ratios, we should be in a position to confirm that the data underlying in computation of various ratios is  valid and consistent. The usefulness of the ratios depends upon the quality of the data in their computation.Ratios must be interpreted with care, since the factors affecting the one variable may sometimes affect another variable. The interpretation and comparison should be done only with prior ratios, predetermined standards or ratios of competitors.
Ratio analysis yields valuable insights into the affairs of the unit and is useful in taking certain decisions.
As such, the bankers who are financing the firms are required to compute various kinds of ratios depending upon the types of assessment (working capital requirement, term loan) or to know the strength and weaknesses of the company to understand the working of the company and to take certain vital decisions at appropriate time.However, before proceeding with the analysis of ratios, one should analyze the working capital structure of the unit that acts as an integral part of the evaluation of liquidity of the firm. This starts with the computation of the percentage of individual components of current assets and current liabilities to total assets and total liabilities respectively.
The lending banker is mainly concerned with the financial ratios on account of the facts that these ratios facilitate the study of relationship between various items or groups of items available in the financial statement. Financial ratios are classified into five broad categories. They are:
Liquidity ratios Leverage ratios Turnover ratios Profitability ratios Valuation ratiosLiquidity refers to the ability of the firm to meet its obligations in the short run, usually one year. They are generally based on the relationship between current assets and current liabilities.
Financial leverage refers to the use of debt finance. While debt capital is a cheaper source of finance, it is a riskier source of finance. Leverage ratios help in assessing the risk arising from the use of debt capital.
Turnover ratios or activity ratios or asset management ratios, measures how efficiently the assets are employed by a firm. These ratios are based on the relationship between the level of activity represented by sales or cost of goods sold and levels of various assets
Profitability reflects the final result of any business operations. Profit margin ratio shows the relationship between the profit and sales whereas the rate of return ratio reflects the relationship between the profit and investments.
Recommend Ratio Analysis of Financial Statements Topics
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