Trade credit is short-term credit (less than one year to maturity). A borrower’s ability to repay short-term credit is determined by its liquidity, or whether it has enough in current assets to be able to cover its current liabilities. Therefore, a credit manager considering whether to grant trade credit to a new customer is not likely to place primary emphasis on valuation ratios. Valuation ratios are important to investors who are considering investing in a company.
Trade credit is short-term credit (less than one year to maturity). A borrower’s ability to repay short-term credit is determined by its liquidity, or whether it has enough in current assets to be able to cover its current liabilities. Therefore, a credit manager considering whether to grant trade credit to a new customer is not likely to place primary emphasis on profitability ratios. Profitability ratios are important when a lender is considering long-term credit (longer than one year).
Trade credit is short-term credit (less than one year to maturity). A borrower’s ability to repay short-term credit is determined by its liquidity, or whether it has enough in current assets to be able to cover its current liabilities. Therefore, a credit manager considering whether to grant trade credit to a new customer is not likely to place primary emphasis on growth ratios. Growth ratios, or growth rates, are used to determine how fast a company is growing. Growth ratios are important to investors who are considering investing in a company. Growth ratios are generally stated in terms of the percentage of growth from the prior year, i.e., "sales revenue increased by 25% over last year." Sales growth is important because it indicates an increasing market for the firm's products and services. Growth in net income is even more important than sales growth, because net income tells the investor how much money is left over after all the operating costs are subtracted from sales revenue. Growth in dividends is used by investors as an indicator of the financial health of a company.
Trade credit is short-term credit (less than one year to maturity). A borrower’s ability to repay short-term credit is determined by its liquidity, or whether it has enough in current assets to be able to cover its current liabilities. Therefore, a credit manager considering whether to grant trade credit to a new customer is most likely to place primary emphasis on the company's liquidity ratios.
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