Which of the following financial measures are used to determine a company's credit rating? a)A company's current ratio, quick ratio, inventory turnover ratio, and default risk ratio b) Its ratio of annual interest payments to net profits, current ratio, working capital ratio, debt-equity ratio, and percentage return on capital employed c) Its loans outstanding as a percentage of total revenues, default risk ratio, inventory turnover ratio, and long-term debt-to-equity ratio d) Its total debt-equity ratio, current ratio, working capital ratio, and ratio of prior-year cash flow from operations to prior-year interest payments e) The percentage by which prior-year cash flow from operations covers a company's prior-year interest payments, the company's debt-asset ratio, its dividend payout ratio, and its default risk ratio
Company's credit rating - is a rating which determines the credit worthiness of a company i.e., it is used to determine whether a company will be able to discharge its financial obligations or not. Such rating is carried out by a credit rating agency.
The important ratios that are used to determine company's credit rating are-
Interest coverage ratio -This is a financial ratio. It helps to determine how well a firm can discharge its interest obligations on outstanding debts.
Default risk ratio-It is calculated as free cash flow divided by combined annual principal payments on all outstanding loans. This ratio carries a high weighted for determining credit rating of a company.
Debt to assets ratio- This is a leverage ratio. This ratio helps to find the degree to which a businesses operations are funded by debt and a debt-to-equity ratio of 0.25 to 0.30 is considered good.
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