Financial ratio analysis is conducted by managers, equity investors, longterm creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Financial ratio analysis is conducted by managers, equity investors, longterm creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

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December 18, 2021
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Financial ratio analysis is conducted by managers, equity investors, longterm creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?

Answer and ExplanationSolution by a verified expert

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Financial ratios are the accounting tools that determine the financial health of any business.

Explanation
Financial ratios are parameters used to measure the performance of a company over the years, and its comparison with other peer companies.

Groups of analysts have the following objectives while they analyze the financial ratios:

Managers: Management calculates ratios to identify their weaknesses so that actions could be taken to improve them. Also, the firm has to present financial statements and various ratios to banks for funds related matters, and to the government for tax-related matters
Equity investors: Equity shareholders use the financial ratios for profitability analysis and to take decisions to hold or to withdraw their investments
Long-term creditors: Creditors look for the safety of their money by analyzing solvency ratios to determine whether the company is in a position to pay their debts, and to timely pay their interest obligations
Short-term creditors: Other creditors look for liquidity ratios to determine whether the company would be able to meet up their short-term liabilities
Verified Answer
Various purposes for the evaluation of financial ratios are:

Management for comparison and improvement
Equity shareholders for profitability analysis
Long term creditors for the safety of their money
Short term creditors for liquidity

Financial ratio analysis serves distinct purposes for different groups:

  1. Managers: They use ratios to identify weaknesses in the company's performance, enabling them to take corrective actions for improvement. Additionally, financial statements and ratios are crucial when seeking funds from banks or addressing tax-related matters with the government.
  2. Equity Investors: Equity shareholders utilize financial ratios to analyze the profitability of their investments. These ratios assist them in making informed decisions on whether to retain or withdraw their investments in the company.
  3. Long-term Creditors: Creditors, with a focus on the long term, assess solvency ratios to gauge the company's ability to repay debts and meet interest obligations. This analysis helps them determine the safety of their investments over an extended period.
  4. Short-term Creditors: Creditors with shorter-term interests examine liquidity ratios to assess the company's ability to fulfill its short-term liabilities promptly. This provides them with insights into the company's immediate financial health.
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