How do you think the IRS or lenders might use ratios when lo

How do you think the IRS or lenders might use ratios when looking at companies?

Solution

IRS or lenders might use a lot of ratios when looking at companies

The ratios are divided into many categories

Activity Ratio/ Asset management ratios also known as efficiency ratios indicate the efficiency of the use of assets in generating sales.
These are the efficiency ratios :average collection period, inventory turnover, cash conversion cycle, fixed assets turnover and total assets turnover

Liquidity Ratios gauge the firm\'s ability to meet its short term obligations.

These are: Current Ratio, Quick Ratio and Cash Ratio

Leverage Ratios: Also called debt management ratios measures leverage and debt servicing ability of the firms

These are: Debt to Assets, Debt to Equity, Interest Coverage and Debt Service Coverage Ratios

Profitability Ratios: assesses the firm`s ability to earn profits on sales, assets and equity.

These include: Gross Margin, Operating Profit Margin, Net Profit Margin, Return on Equity and Return on Assets.

Valuation Ratios can also be used to assess the firm from the shareholders\' point of view

These include: price/ earnings, price/book value ratio, price/cash flow ratio, and dividend yield

This is how IRS / Lenders assess the firm by evaluating all types of ratios.
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