Question

With respect to the many accounting and financial ratios calculated in this chapter, should one assume that certain capital providers are more interested in one category of ratio over another? Why might this be so? If true, what would fixed income providers likely seek? What would equity holders likely prefer?

With respect to; liquidity ratio, assest management ratio, debt ratio, market value ratio, common size and percentage change

Answer 1

Ratio analysis is a analysis which is quantative in nature. In this the financial statements of the company are analysed. Ratio analysis can be done for the evaluation of entity with various aspects which includes profitability , liquidity , efficiency etc.

Yes it is assumed that certain capital providers are more interested in one category of ratio over another This might be so as there are many types of investors in the company for example long term loans , debentures , equity etc and all these securities are different in nature as debentures receives interest while the equity holder receives dividend. The company can make prefrence in payment of interest as compared to dividend to equityholders. So everyone view the fundamentals as per own benefits. There are various ratios and every ratio shows different thing.

Fixed income providers are likely seeks the ratios that can affect their interest payments such as Interest Coverage ratio , Financial Leverage , debt ratio etc as these shows the condition of the company in making payments of fixed incomes.

And the Equity holders are likely to prefer the ratios like liquidity ratio , market value ratio , liquidity ratios as these ratios shows the growth of the company , the ability of the company for paying dividend , the stability of the company etc...

Liquidity Ratio = This ratio shows the liquidity position of the company. It is ratio between liquid assets and liquid liabilities.

Asset management Ratio = This ratio shows the success of the firm of producing sales with the amount invested in fixed assets.

Debt ratio = Debt Ratio is the ratio which shows the percentage of debt as compared to the total capital employed

Market Value Ratio = This Ratio shows or used to evaluate the current price of the share