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Business Administration QUESTION #9592
Question 1
A creditor bank is evaluating a company's loan application. Which combination of financial ratios provides the most complete picture of the company's ability to service debt, and why?
  • Return on Equity (ROE) and Earnings Per Share (EPS) — because creditors want to know if the company is profitable enough to service debt
  • Current ratio, Debt-to-Equity ratio, and Interest Coverage ratio — because creditors need to assess short-term liquidity (ability to meet current obligations), leverage (extent of debt burden) and earnings coverage of interest payments✔️
  • Price-to-Earnings ratio and Dividend Yield — because creditors assess equity market confidence as a proxy for creditworthiness
  • Gross Profit Margin and Inventory Turnover — because operational efficiency determines the cash generation capacity that ultimately services debt
Correct Answer Explanation
Creditors specifically need: current ratio (short-term liquidity — can they meet immediate obligations?), debt-to-equity (leverage — how much debt already exists relative to equity cushion?), and interest coverage ratio (EBIT/Interest — do earnings cover interest payments with adequate margin?). ROE/EPS and P/E are more relevant to equity investors; gross margin/inventory turnover assess operations but not debt serviceability directly.