Marble Savings' objective is the repayment of the loan, with interest. A high net profit margin, if it is sustained for more than one year, is a good indicator of the firm's ability to repay a loan. However, a high degree of financial leverage is not a good sign. Sonex's degree of financial leverage is higher than the industry average. A firm with high financial leverage has a greater risk of financial failure and of defaulting on the loan if sales and profits should drop in future years. Therefore, a long-term loan made to Sonex has a higher risk of not being repaid than a long-term loan made to another company. Marble Savings' objective is the repayment of the loan, with interest. The debt/equity ratio is one indicator of a firm's long-term debt repayment ability, and a low debt/equity ratio is desirable. Bailey has the highest debt/equity ratio of the three companies, which is undesirable. Therefore, a long-term loan made to Bailey has a higher risk of not being repaid than a long-term loan made to another company. Marble Savings' objective is the repayment of the loan, with interest. Nutron's low debt/equity ratio and low degree of financial leverage are an indication of its long-term debt repayment ability. A firm with low financial leverage has less risk of financial failure and of defaulting on the loan than a firm with higher leverage would, so a long-term loan made to Nutron would have the greatest probability of being repaid. This is not a true statement. One of these companies represents a better credit risk than the others.
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