Financial Statement lending: leverage ratio

Nonetheless, for mergers and acquisition purposes, in addition to liquidity, profitability, and solvency ratios, leverage ratio is included. Leverage ratio is the liabilities to values proportion. In case a client or a company is extensively indebted as liabilities are extensive, naturally banks shy away from closing any deals. Relative to this leverage ratio assessment is also the appraisal of activity ratio. Such an undertaking will hugely reveal how a client or a company direct and control assets. Importantly, assets or accounts payable turnover must be consistent with typical practices acceptable to banking standards. Usually, banks do not deal with clients who are seen to be perennial bad payers (Berger & Udell, 2003)

These four ratios are deemed to be significant aspect for revealing information as regards efficiencies on financial risk management. In cases where liquidity, profitability, solvency, and leverage ratios turn out to be conducive to an uptrend return of investments, clients are usually given the opportunity to avail of monetary bank loans (Berger & Udell, 2003).