# Core Theory: Users and Applications of Financial (Ratio) Analysis
## Users and Objectives — a Bird's Eye View
Different stakeholders read financial statements for different purposes and therefore rely on different ratios.
| User | Objective | Ratios Used |
|---|---|---|
| Shareholders | Profitability and growth of the organisation | Profitability ratios (EPS, DPS, P/E, Dividend Payout) |
| Investors | Overall financial health and future perspective | Profitability, Capital Structure, Solvency, Turnover ratios |
| Lenders | Safety of money lent | Coverage, Solvency, Turnover, Profitability ratios |
| Creditors | Liability position, especially short-term obligations | Liquidity, Short-term Solvency ratios |
| Employees | Financial health vs competitors | Liquidity, Long-term Solvency, Profitability, ROI |
| Regulator / Government | Taxation and other payments | Profitability ratios |
| Managers | Decision-making | Various (see below) |
Managers drill into ratios specific to their function:
- Production Managers → Input-output ratio, Raw Material Consumption ratio
- Sales Managers → Turnover ratios (e.g. Receivable Turnover), Expense ratios
- Financial Managers → Profitability (ROI), Turnover, Capital Structure ratios
- CEO / General Manager → All ratios (overall perspective)
Industry-specific analysis compares a company's ratios with industry norms:
- Telecom → Call ratios, Revenue & Expenses per Customer
- Bank → Loan-to-Deposit ratios, Operating Expenses & Income ratios
- Hotel → Room Occupancy ratio, Bed Occupancy ratio
- Transport → Passenger-Kilometre, Operating Cost per Passenger-Kilometre
## Application of Ratio Analysis in Financial Decision-Making
| Aspect | Explanation |
|---|---|
| Liquidity Position | Liquidity ratios assess ability to meet short-term obligations — important for bank credit analysis and short-term lenders. |
| Long-term Solvency | Uses leverage (capital structure) and profitability ratios to judge long-term health and ability to manage debt. |
| Operating Efficiency | Activity (turnover) ratios measure how efficiently assets are managed; solvency depends on generating sales from assets. |
| Overall Profitability | Ratios considered collectively to judge ability to meet obligations, reward owners, and use assets well. |
| Inter-firm Comparison | Comparing with industry averages/competitors highlights strengths and weaknesses, guiding remedial action and forecasting. |
| Financial Forecasting / Budgeting | Ratios help budget and estimate future activity based on past data. |
## Key Takeaway
No single ratio is conclusive. The same ratio means different things to different users, and a sound judgement requires reading ratios collectively and comparatively (against past periods and against industry peers).