Question

1. Explain the key items of interest to the following groups of people when completing a financial statement analysis:

-investors,

-creditors

-and management.

Answer 1

For Investors,

Financial statement analysis is very important for different sets of people in understanding the performance parameters for their relation with the firm.

From investors point of view, some of the key items of interest are the valuation ratios like P/E, P/BV and EPS. All these help investors take a decision on the valuation of the firm which takes precedence over other parameters when investing.

For Creditors,

For creditors, as their primary aim is to get their funds back, some of the key ratios are debt service coverage ratio, debt to equity ratio, interest coverage ratio or times interest earned.

For Management,

Management will be keenly looking at improving the efficiency and effectiveness of the firm. Some of the key ratios from a management's perspective are

Efficiency ratios like Receivable turnover, inventory turnover and payable turnover. In addition, management will also be interested in profitability parameters like Gross profit ratio, Operating profit margin and Net profit margin