Financial Ratios Identified
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Identify two ratios that you feel would be most important for each of the following groups. Explain your rationale.
Shareholders.
Bankers.
Bondholders.
Managers.
Then, asssess these two ratios defined for each group and make an additional argument for a third important ratio for each group.
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Solution Summary
The expert identifies financial ratios for Shareholders, Bankers, Bondholders and Managers.
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Dear student,
Identify two ratios that you feel would be most important for each of the following groups. Explain your rationale.
Shareholders.
Bankers.
Bondholders.
Managers.
Then, assess these two ratios defined for each group and make an additional argument for a third important ratio for each group.
Shareholders: The shareholders are concerned about the profitability of the company and the amount of dividend. Therefore, following two ratios are important.
Net profit margin ratio= (net profit/sales)*100
This ratio shows the amount earnings made out of each dollar of sale value. This ratio shows the operational efficiency of the management of the company. For example, if the net profit for the year 2007 is $100000 and the company has made the net sale of $10,00,000, then net profit margin ratio is ($100000/$10,00,000)*100=10%. The shareholders would compare this ratio with that of other companies and with industry average. If this ratio is high, then the shareholders would be happy and they will try to acquire more shares of the company. If the ratio is negative, then they will sell their shares.
Earnings per share: This ratio is also important to the shareholders. This ratio shows the amount of earnings made for each dollar of share value. Earnings per share = Amount of earnings available to equity holders/number of shares
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