Question

If we divided the users of financial ratios, such as short-term lenders, long-term lenders, and stockholders, which ratios would each prefer and why? Provide examples and explain.

Answer 1

The financial ratios is a measure of the financial position of a company. These ratios are being used by various users who are having a good stake in the company. These users could be :

1) Short term lenders: The short term lenders are those investors who provide monies or supply materials for a year or below that. They always measures the performance of the company through the Profitability and Liquidity ratios like Gross profit and Net profit ratios, current ratios, working capital position and quick ratios, interest coverage and other operating ratios.

2) Long term lenders: These lenders provide long-term loans and assets to the company like Banks and Financial insttitutions. These lenders are interested in having ratios like leverage ratios, Turnover ratios, Liquidity and Stability Ratio. These ratios covers the profitability ratios and liquidity ratios like current ratio, Debt to equity ratio, Debt coverage ratio, Fixed assets ratio and Capital structure ratios like proprietory ratio and Capital gearing ratios.

3) The Shareholders : they are the legal owner of the company, so their main attention is towards the Profitability ratios, Price earnings ratio, Pay-out ratio, Dividend yield ratio, Leverage ratios and the Liquidity and Stability ratios like Debt-Equity ratio, Capital gearing ratio and Proprietory ratio.

=====================================================