Financial ratio analysis is conducted by four groups of analysts: managers, equity investors, long term creditors and short term creditors.
The primary emphasis of each of these groups in evaluating ratios is:
1. Management: They use ratio analysis to determine how effectively the assets are being used. They are interested in future growth and, prospects. They design various policy measures and draft future plans Consequently, they are interested in Activity Ratios and Profitability Ratios like Net Profit Ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratios, etc..
2. Equity Investors: The main concern for the investors is the security of the funds invested by them in the business and returns on their investments. The security of the funds is directly related to the profitability and operational efficiency of the business. Consequently, they are interested in knowing Earnings per Share, Return on Investment and Return on Equity.
3. Long-term Creditors: Long-term creditors provide funds for more than one year, so they are interested in long term solvency of the firm and in assessing the ability of the firm to pay timely interests. Consequently, they are interested in calculating Solvency Ratios like, Debt-Equity Ratio, Proprietary Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio, etc.
4. Short-term Creditors: Short-term creditors are interested in timely payment of their debts in short run. Consequently, they are interested in Liquidity Ratios like, Current Ratio, Quick Ratios etc. These ratios reveal the current financial position of the business.
