Financial Ratios for Managers and Investors Essay
The ratios considered useful by upper management will be different than what an investor consider useful. Senior management will be concerned with the ratio like return on total assets because they want to know how the company is fairing overall and whether they will be able to meet the debt holders liability and shareholders expectation. An investor will be more concerned with ratios like return on equity because they just want to know how whether they will be able to make profit on their investment.
Senoir management who has to handle the day to day functioning of the company will be concerned about the various turnover ratios like inventory turnover ratio( to see that excess amount is not blocked in inventory), total assets turnover ratio (to see that all the assets are put to the maximum utilization) , account receivables turnover ( to see that company is able to effectively implement the credit policy),.
Other set of ratio the upper management will be concerned will be some leverage ratios like fixed charge coverage ratio ( to see that company will be able to meet debt holders obligation and will not be forced into bankruptcy), Debt to total assets ratio ( to see that leverage remains in controllable limit). An investor will be concerned with ratios that directly effect them like debt to equity ratio which helps them analyze that amount of debt in company and whether they can be paid in periods of low earnings.
They also pay attention to other ratios like cash flow per share ( it might happen that company have earnings but no cash to pay dividends, this ratio helps to keep a check on cash), payout ratio ( to see that sufficient earnings are distributed ) and price earning ratio ( to adjust the market price as per the companies earnings). In brief upper management is more concerned with the ratios which overall effect the company and investors look more towards which directly effect the finanances of company