Question

if stakeholders could only have access to two financial ratios for a firm, which two ratios do you think they should select to review and why

Answer 1

The two most important financial ratios for a stakeholder should be the PE ratio and the ROE (return on equity). PE ratio is the ratio of the price to earnings. It is an important indicator of how the market views the firm with respect to the earnings. A firm with a low PE ratio is generally considered to be a value firm (although this will differ from sector to sector). A modified version of the PE ratio, the PEG ratio is even more informative as it takes into consideration, the futre earnings growth. It is calculated as the PE ratio divided by the forecasted annual earnings growth. A PEG ratio of less than 1 is considered good.

Another important ratio is the return on equity (ROE) which is calculated as the net income divided by shareholder's equity. It is important because it indicates how much return a firm is able to generate for its shareholders. The higher the ROE, more valuable the firm is for the shareholders.