Why do creditors need financial reports

Debt includes borrowed funds from banks but also bonds issued by the company. Bonds are purchased by investors where companies receive the money from the bonds upfront. When the bonds come due—called the maturity date —the company must pay back the amount borrowed. If a company has too many bonds coming due in a specific period or time of the year, there may not be enough cash being generated to pay the investors.

In other words, it's important to know that a company can pay its interest due on their debt, but also it must be able to meet its bond maturity date obligations. The debt-to-equity ratio measures how much financial leverage a company has, which is calculated by dividing total liabilities by stockholders' equity.

A high debt-to-equity ratio indicates a company has vigorously funded its growth with debt. However, it's important to compare the debt-to-equity ratios of companies within the same industry. Some industries are more debt-intensive since they need to buy equipment or expensive assets such as manufacturing companies. On the other hand, other industries might have little debt, such as software or marketing companies.

The interest coverage ratio measures the ease with which a company handles interest on its outstanding debt. A lower interest coverage ratio is an indication the company is heavily burdened by debt expenses. Efficiency ratios show how well companies manage assets and liabilities internally. They measure the short-term performance of a company and whether it can generate income using its assets. The inventory or asset turnover ratio reveals the number of times a company sells and replaces its inventory in a given period.

The results from this ratio should be used in comparison to industry averages. Low ratio values indicate low sales and excessive inventory, and therefore, overstocking. High ratio values commonly indicate strong sales and good inventory management. Price ratios focus specifically on a company's stock price and its perceived value in the market. The dividend yield ratio shows the amount in dividends a company pays out yearly in relation to its share price.

The dividend yield provides investors with the return on investment from dividends alone. Dividends are important because many investors, including retirees, look for investments that provide steady income. Dividend income can help offset, at least in part, losses that might occur from owning the stock. Essentially, the dividend yield ratio is a measurement for the amount of cash flow received for each dollar invested in equity.

There is no one indicator that can adequately assess a company's financial position and potential growth. That is why financial statements are so important for shareholders and market analysts alike. These metrics along with many others can be calculated using the figures released by a company on its financial statements. Tools for Fundamental Analysis. Financial Ratios. Fundamental Analysis. Financial Statements. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.

At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance.

Your Practice. When not debiting or crediting, Keir has a penchant for fixing old buildings, skiing, surfing and cycling.

We're accountants who specialise in working with small businesses, from start ups to growing businesses. With offices in London and Brighton, we're a highly cost effective solution for compliance but also for strategic planning, bookkeeping, tax and accounting support.

Toggle navigation info accountsandlegal. Instant Quote. Client log-in. Everything you need to know about Creditors and Debtors. What is a creditor? What is a debtor? Debtors and creditors in a small business Customers who do not pay for products or services up front, for example, are debtors to your business, which serves as the creditor in this scenario.

Example of debtors and creditors together Debtors and creditors work in tandem in everyday life, potentially a lot more than you realise. Keir Wright-Whyte Managing Director k. About the author Originally graduating with a degree in geography from Edinburgh University, Keir claims that he was then tricked into becoming an accountant by one of the UK's top 5 accountancy practices. Send without subscribing.

Send and subscribe to our newsletter. This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Read More. Table of Contents. How are employees who wear prescription lenses supposed to protect their eyes? Is it good to close car loan early? Accept Decline Cookie Settings. I consent to the use of following cookies:. Cookie Declaration About Cookies. Necessary 0 Marketing 0 Analytics 0 Preferences 0 Unclassified 0.

Necessary cookies help make a website usable by enabling basic functions like page navigation and access to secure areas of the website. The website cannot function properly without these cookies. We do not use cookies of this type. Marketing cookies are used to track visitors across websites.