Chapter 3

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  • Topic: Financial ratio, Financial ratios, Asset turnover
  • Pages : 2 (753 words )
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  • Published : October 4, 2012
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End-of-Chapter Questions
(3-2)
Financial ratio analysis is conducted by managers, equity investors, long-term creditors and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios? Managers deal with all types of ratios. It is important for them to judge and improve the overall financial position of the company. Financial ratios are one of the most common tools of managerial decision making. Financial ratios involve the comparison of various figures from the financial statements in order to gain information about a company's performance. Ratios to this group, serve as indicators, clues, or red flags regarding noteworthy relationships between variables used to measure the firm's performance in terms of profitability, asset utilization, liquidity, leverage, or market valuation. Equity Investors use the analysis of financial ratio to help equity investors know whether their investment earnings some return or not. They emphasize more on profitability ratios with those investors look for entities with high earning potential and will be reluctant to associate themselves one that poor return since the market price of stock and dividend potential will be adversely affected. Long-Term Creditors deal mostly with the solvency ratios. They are important because the ratios under this category indicate the long term financial position of the company in terms of its solvency. Financial ratios analysis helps long term creditors to know company’s ability to meet interest expenses and long term obligations on time. Times interest earned ratio, debt to total assets turnover ratio, debt to shareholders equity ratio are also some of the ratios that are helpful for long term creditors. Short-term Creditors find liquidity ratios as more important. The analysis of financial ratios assists Short term creditors to know the ability of company to pay their short term obligation. They mainly focus on corporate liquidity is especially important to...
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