Question

Individuals performing ratio analysis include (1) banks evaluating potential loan applications from small businesses, (2) investment analysts evaluating the investment quality of a firm’s stock, and (3) internal management, assessing the firm’s current strengths and weaknesses. Select one of the three parties above, and for that party, identify which of the five ratio groups (liquidity, activity, debt, profitability, or market) would be of most value and which would probably be of least value. Explain the reasons behind your choices.

Include a source please and a min of 150 words (:

Answer 1

The internal management makes use of ratio analysis to analyse the firms current strengths and weakness. Out of the five category of ratios, the most useful for the internal management is profitability and activity ratios which meansure the efficiency with which a company uses its assets like inventory, receivables or total assets to generate sales. The management is interested in knowing the amount of profits the company is earnings because a business exists to earn profits and also if the company is making best use of its assets to generate profits.

The category of ratio of least value to the internal management would be market ratios becuase the market performance is not in the hands of the management and the share prices are determined by the market forces. The share prices are a reflection of the prefitabiltiy of the firm, hence if the company is making enough profits, its market performance would automatically be good.