Let’s see why these users (as enlisted on previous page) are eager to know about the organization they are interacting with.
If you are supplier, you might be supplying raw material or goods to an organization so that organization can process them and generate profits. You will normally supply on short term credit where company agrees to pay you after, perhaps, 10 day, 15 day, 1 month or 3 months. What will be your concern? Obviously you will be interested to know whether company will be able to pay the debt or not.
Thus suppliers are particularly concerned about SHORT TERM LIQUIDATION of a company. They would like to know whether company will be able to meet its short term obligations or not. They will be interested in company’s current assets ability to meet current liabilities. If, from financial statements, the suppliers interpret that company will not be able to meet its short term obligations they will cease their business with the company on credit.
Liquidity Ratios (explained on following pages) are, therefore, particular concern of suppliers.
If you are working for a company as an employee what will be your concerns?
Logically the prime concern of yours might be JOB SECURITY. You would like to know the company’s financial health i.e. whether company will be going concern (prosperous) in future or not.
You might also be interested (and it is natural) about the PAY OR SALARY INCREEMENTS. If company is earning high profits you may expect bonuses and salary increments; if company is in losses you may have to stay on the same package of salary until the company starts earning profits or you decide to leave the company for better opportunity.
Thus employees are interested to know the profitability and financial health of a company. Therefore, in financial statement analysis employees might be looking for profitability ratios (explained on following pages).
Institutions (most commonly financial institutions) or persons lend the money to company so that company can use these funds to earn profits and in return, pay interest to those lenders as well as the principal amount being borrowed in accordance with the terms and conditions agreed between the company and lenders at the time of borrowing money. Normally such terms and conditions are long term i.e. for more than 1 year, perhaps, 2 years, 3 years, 5, 10 or may be longer than that.
Based on aforesaid think yourself as a lender to a company; what will be your prime concerns?
Obliviously you will be interested about the SAFETY OF MONEY you have given to the company i.e. does the company able to repay the principal amount borrowed by it, back or not? What is financial health of company?
Similarly you will also be interested to know the ability of the company to PAY INTEREST ON LOAN borrowed by it. Is the company generating enough “operating profits” to cover the interest to be paid on money borrowed?
In short we may say that lenders are interested about the safety of money and payment of interest on such money forwarded as loan to the company. Therefore, among other things, they should particularly look for Long term solvency (liquidity) / financial leverage ratios (explained on following pages).