An over view discussion from a creditor’s point of view

Creditors are those people who lend money to the organization for better running in the competitive market. Their money is used in the company as a capital. They are not the owner of the company because they don’t get any dividend but they are the creditor of the company and they get interest against to their loan. The people from whom the company purchases material on credit are also the creditor of the company. Creditors mainly gave emphasize on Liquidity dimension and Debt utilization. Some time they also observe activity dimension. The ratios that creditor pay attention to lend money is as follows:

1. Current ratio
2. Quick ratio
3. Cash ratio
4. Account payable turnover
5. Turnover in days
6. Debt ratio
7. Time interest earned

All of these ratios mainly give result that whether the company is able to pay their liability or not, how they are performing in the market and what is their liability position related with their total asset.

Here the current ratio is only .74 times, which means that current asset is less than current liability and this is the worst situation for any company from creditor’s point of view. The company has started in 1973 but it has a low current asset than current liability. The quick ratio and cash ratio bears the same result. In 2001 quick ratio is only .30 times and cash ratio is .0629 times. The liquidity position of this company is very bad. In this position no one will be interested to invest money in this organization. This company should pay attention to increase liquidity ratio as soon as possible because this situation is very much risky. In this condition there is a good chance for any company to become bankrupt.

Higher ratio of time interest earned means firm has higher ability to pay the interest from their opportunity income. There is a sharp decline of this ratio in 2001 from 2000 indicated that the firm is paying more interest because in that year their short-term bank loan became double. By analyzing this ratio we must say that the company must decrease their short-term bank loan and if they continue to take loan this way, they will fall in big problem and it might be cause of bankruptcy. So that in this case also any firm will not be interested to give them loan.

But there is still some good news for creditors. That is Debt Ratio and Accounts Payable turnover in days. In debt ratio we see that there is a continuous decrease of debt ratio from the year 1999. In 2001 the debt ratio is only 33.86%. It means that 33.86% of total asset is financed by creditor which is good for any company. The situation is still good because the company is in less riskier position. In 2001 Accounts Payable turnover in days is only .47 days. It means that the firm pays it’s debt very quickly. As a result account payable turnover has increased during 2001.

Now we must give a look on cash flow statement. From cash flow statement we see that the firm has not taken any loan in the year 2001. Moreover they have paid a large volume of it’s previous loan. As a result the current asset has decreased significantly. Now the decision is the firm must pay more attention in increasing it’s current asset.

By analyzing all sorts of these things we can say that the company’s overall situation is not good from a creditor’s point of view. Though the company is doing well from an investor’s point of view but it has to be careful about its liquidity and liability to build a good image from creditor’s point of view.