UNIT 2 INDIVIDUAL PROJECT 2 Essay Example | Topics and Well Written Essays - 500 words

UNIT 2 INDIVIDUAL PROJECT 2 - Essay Example rt from the external short and long-term creditors of the company, the investors and lender’s interested in a company consider ratios as an important indicator for decision making. The investors look to measure the capacity of the firm to provide them with adequate return on their investment. Similarly banker’s who look to lend money or advance money to any firm would use the below ratios to assess the capacity of the borrower firm to repay the debt. As we know the primary purpose of every firm is to maximize shareholder’s wealth. The bottom line of the company is the prime focus for both the management and the external investors / lenders of the company. Thus, the net profit ratio helps us understand the percentage of net profit after all expenses to the total revenue of the company. It is an indicator of how well the company’s management has worked not only towards accelerating revenues, optimizing costs including cost of borrowed funds but also providers the owners an understanding that there would be adequate return on their capital employed. A higher net profit would mean adequate returns to the shareholders and the lenders. â€Å"Debt-Service Coverage Ratio† is an important ratio for every banker or lender who is looking to finance or provide funds as borrowings to the company. This ratio is indicative of the capacity of the company to make enough earnings before tax to ensure that the loan is being serviced. In other words, the ratio (if above 1.5) indicates that the organization makes enough earnings to repay interest and principle payments of the funds borrowed on a monthly basis. Indeed, the banker or the lender considers this ratio as a prime indicator of the capacity of the firm to repay back the debt that they fund. ROCE is one of the important ratios used to understand the return on investment or capital employed. The term capital employed means long term funds supplied by creditors and owners of the firm. This ratio helps in measuring or