Who are the users of financial ratio analysis? Explain the
significance of ratio analysis to them?
The users of financial ratio analysis are as follows:
3. Short term Creditors
4. Long term Creditors.
The following points signify the importance of ratio analysis for
1. 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.
2. Management- They uses 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
3. 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.
4. 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.
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