ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements
A bank is considering a request for a ten-year loan from Orla Co. Which ONE of the following sets of ratios would be of most direct interest to the bank in assessing the long-term risk of lending?
Gearing and interest cover are most relevant to a long-term lender because they show how heavily the company is financed by debt and how easily profit covers interest. EPS and dividend yield serve shareholders, while operating ratios are less direct indicators of repayment risk.
- AGearing and interest coverCorrect
- BEarnings per share and dividend yield
- CInventory holding period and gross margin only
- DReturn on capital employed and asset turnover only
Explanation
A long-term lender is concerned with whether the borrower can pay interest and repay capital. Gearing shows the extent of debt financing and interest cover shows how comfortably profit covers finance costs. EPS and dividend yield are shareholder measures. The other sets measure operating performance and efficiency, which are less direct for assessing long-term lending risk.
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