Every business is looking to make profit and various entities are associated with the business. Examples of enties would include Investors, Suppliers, Creditors etc. There are multiple financial ratios which help evaluate the health of the business. Depending on the role of the entity involved with the business, There are different ways of evaluating the proficiency of the business. Lets focus on the below roles involved in the business ecosystem. 1) Indvidual investor 2) Investor as a Fnancial Institution(FI) 3) Supplier 4) Creditor Individual Investors - There are two categories of investors - Short term and long term individual investors who look out for below ratios to determine their interest. They don't make large investments. Short term investor - is always looking for getting their principal investment out in near term and as soon as possible. This group may want to make quick money through dividends. In this case they would look for the below mentioned ratio. This group mostly invests in penny stocks. Dividend yield = dividend share / price per share Long term individual investor is willing to earn the Return On Investment(ROI) over the period of time. This group will follow the below ratios to make the judgement for the investments. 1) Earning per share(EPS) = net income - dividends of preffered stock / average outstanding shares 2) P/E ratio (Price to earning ratio) = Price per share / earnings per share. Individual as FI - This group makes large investments and will be interested in more ratio's as compared to long term individual investors. Following ratios are evaluated by the FI's to make thier investment in any company. (In addition to EPS and P/E) 1) Asset turnover ratio = Sales / Average total Asset 2) Price to sales ratio = Price per share / Annual sales per share 3) Proft margin = net income / sales 4) Return on equity = Net income / average stock holder equity 5) Debt-to-Equity Ratio = Total Liabilities / Total Shareholder Equity Suppliers - They want to make sure that the company will be able to pay them back for the goods supplied or the services rendered. Hence they will be looking at the the liquidity of the company. Following ratios are evaluated by the suppliers. 1) Current ratio = Current asset / current liabilities 2) Acid test ratio (Quick ratio) = (current asset - inventory) / current liabilities Creditors - The credit insitutions are interested in making sure that the company will be able to payabck the loan (liability). Hence the creditor will also look at the ratios evaluated by suppliers along with following ratios below. 1) Total debt to net worth ratio = current + deffered debt / tangible net worth. 2) Current assets to total debt = current assets / current + long-term debt 3) Proft margin = net income / sales 4) Return on sales = net profit / sales There are other ratios which will be relevant fo the roles above. However, this article is focused on key ratios for the role based entities who look for key indicators of a company for doing business. Refer the below reference for other ratios. http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html
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