Which measure would a long-term creditor be least interested in reviewing?
a.free cash flow
b.debt to total assets ratio
c.current ratio
d.solvency measure
Probably c.
thank you
free cash flow
A long-term creditor is primarily concerned with the financial health and ability of a borrower to repay their debts over an extended period. To determine this, creditors usually review various financial measures.
Out of the options provided, the measure that a long-term creditor would be least interested in reviewing is a) free cash flow.
To understand how to arrive at this answer, let's briefly explain each measure:
a) Free Cash Flow: Free cash flow represents the amount of cash generated by a company's operations that is available for use after funding capital expenditures. It is a measure of a company's liquidity and ability to generate cash. While free cash flow is an important indicator of financial performance, a long-term creditor might be less interested in this measure because they are primarily concerned with the borrower's ability to meet their debt obligations over the long term.
b) Debt to Total Assets Ratio: This ratio measures the proportion of a company's assets that are financed by debt. It indicates the company's leverage or dependency on borrowing to fund its operations. A long-term creditor would be interested in reviewing this measure as it provides insights into the borrower's financial risk and ability to handle debt in the long run.
c) Current Ratio: The current ratio measures a company's ability to meet its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. This ratio reflects the company's short-term liquidity and its capacity to cover its current obligations. A long-term creditor would be interested in reviewing the current ratio because it provides an indication of the borrower's ability to address their immediate debt commitments.
d) Solvency Measure: Solvency is the ability of a company to meet its long-term debt obligations. A solvency measure would assess the company's financial stability and its capacity to repay its long-term debts. A long-term creditor would be highly interested in reviewing this measure to evaluate the borrower's ability to honor their obligations over an extended period.
Based on the explanations above, the answer is a) free cash flow since this measure focuses more on a company's short-term liquidity, which may be less relevant to a long-term creditor primarily interested in the borrower's ability to repay long-term debts.