Why Are Ratios Useful?

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Why are ratios useful? What three groups use ratios, and for what reasons? Ratios in any aspect are very useful. In the financial sense, they are able to deliver in depth information that cannot be concluded from just looking at the financial statements. The ratios help identify positive and negative trends that are financial. Ratios also allow a business to compare theirs to others, and can be used for financial research as well. It can also be used for comparing assets and liabilities. This helps to identify whether the business is losing cash or not. Ratios can tell if the business is using its assets appropriately, and if liabilities of the company are well-managed. It shows whether a business can invest in more capital, or if there is room for business growth. It shows whether a business will be able to pay off its debts or their short-term expenses or their daily expenses. It basically shows the strength and weaknesses of the business. It helps for forecasting on making certain financial decisions. The three groups that use these ratios are managers, potential investors or lenders, and stockholders. The reason the managers use these ratios, is to have a closer look and be able to identify situations that need their instant attention with in the firm. Potential investors are lenders used a ratio to determine if they should invest in the company or not. As for stockholders they mainly use this information for forecasting dividends, earnings on the free cash flow. Question 2 What qualitative factors should analysts look for when evaluating a company’s likely future financial performance? Explain. When evaluating a company's future financial performance, some qualitative factors that should be considered are future prospects, the current environment weather it may be legal or regulatory, the competition , economy, the level of dependents on the

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