How does a firm use financial ratios? Who else might use financial rat

How does a firm use financial ratios? Who else might use financial ratios and why?

What will be an ideal response?

ANSWER

Financial analysis is not just a tool for financial managers but also can be used effectively by investors, lenders,
suppliers, employees, and customers.
Within the firm, managers use financial ratios to: Identify deficiencies in the firm’s performance and take corrective
action; Evaluate employee performance and determine incentive compensation; Compare the financial performance
of the firm’s different divisions; Prepare, at both the firm and division levels, financial projections, such as those
associated with the launch of a new product; Understand the financial performance of the firm’s competitors; Evaluate
the financial condition of a major supplier.
Outside the company, financial ratios can be used by: Lenders to decide whether or not to make a loan to the company;
Credit-rating agencies to determine the firm’s creditworthiness; Investors to decide whether or not to invest in a
company; Major suppliers to decide whether or not to grant credit terms to a company.