Question

Which ratios or computations would be most important to: (and explain why)

-Creditors and prospective creditors:

-Stockholders and prospective investors:

-Management and the Board of Directors:

Answer 1

Ratios will be:

-Creditors and prospective creditors: Liquidity Ratios such as Current Ratio, Quick Ratio

A creditor is somebody whose money is due by the company. He is most concerned about the repayment of his dues. Liquidity Ratios represent how much are the current assets of the company (cash or readily convertible into cash) in comparison to current liabilities (current dues), hence, it represents the paying capacity of the company to its creditors or settle its current liabilities. Hence, a creditor would be most interested in liquidity ratios of the company.

-Stockholders and prospective investors: Capital Ratios such as debt equity ratio

An investor or stockholders invests for long term in the company. He is more interested in the long term position of the company. Debt is repaid in before any payment is made to the stockholders in the event of liquidation of company. Hence, the investors are more concerned in these ratios.

-Management and the Board of Directors: Profitability Ratios such as Return on Investment

Management and Board of directors are appointed for the successful management of the operations of the company. They are more interested in generating profits for the company. Moreover, many a times their compensation and incentives are also dependent on the profits generated. Hence, management and board of directors are interested in the profitability ratios.