Question

Financial Statement Analysis, specifically Ratio Analysis is often performed by managers, investors, and creditors. What is the primary goal of each of these groups when evaluating ratios?

Answer 1

The goal or objective for analyzing the ratios and profitability is different for different categories. For example, the purpose for doing an analysis by investor will be different from those of manager or creditors. The primary goal can be summarized below for different categories.

1. Investors – The reason why they do the analysis is to understand how much profit or return they are getting or will get on their investments. Another reason is to see how much dividend a company has paid and will be paying in the future based on their plans and growth.
2. Creditors – These can include both short term creditors and long-term creditors. Any credit which is offered to a company comes at a cost and the creditors (specially the long term creditors) are mostly concerned to see that the company is able and in the long run will be able to service the loan because this is where the creditors earn income. Apart from this they would also like to see if the company is in a good position to repay their debts and so they might be interested in the liquidity factor of the company.
3. Managers – Finally they are the person who work with the company daily. Their main objective is to ensure that the business is doing good and the results which the company is producing is comparable with other competitors in the same industry or other verticals.