Buyer Co has ordered goods on credit from Seller Co. Before Seller ships the goods it would like to be sure that Buyer will be able to pay for them within the normal credit period. Assuming Seller has access to Buyer's financial statements, in which of the following ratios will Seller be most interested?

Question

Quizplus · Accepted Answer

Seller will be most interested in the current ratio, as it measures Buyer's ability to meet its short-term obligations (including payment for the goods being ordered) with its current assets. The higher the current ratio, the better the indication of Buyer's ability to pay its debts on time. Dividend yield ratio and price earnings ratio are more relevant for equity investors and are not relevant for assessing creditworthiness. The debt ratio measures the extent to which a company is financed with debt instead of equity and does not necessarily indicate its ability to pay its debts in a timely manner.

Buyer Co Has Ordered Goods on Credit from Seller Co