abhishreshthaa
Abhijeet S
Classification from the view point of users
Ratios may also be classified from the view point of users of accounting information. Thus, we can have the following groups of ratios.
1. From shareholders’ point of view:
There are certain ratios which serve the purposes of shareholders. Shareholders, in general, expect a reasonable return on their capital and reasonable capital appreciation. They are also interested in the safety of their investments.
The major point of interest to the shareholders is the profitability of the organization.
Example: Earnings per share, Return on Proprietor’s funds, etc.
2. From short-term creditors’ point of view:
Short-term creditors of a company are basically interested in knowing the company’s ability to pay its short-term liabilities as and when they become due. Hence, creditors place much importance on the liquidity aspects of the company’s assets.
Example: Current and Liquid ratios.
3. From long-term creditors’ and the Management point of view:
Leverage ratios provide useful information to long-term creditors. Long- term creditors include debenture holders, vendors of fixed assets and term- lending institutions. These creditors are primarily interested in the company’s ability to repay the principal sum and make periodical interest & payments as and when they become due. Besides, the management may use borrowed funds as a lever to improve earnings.
Example: Equity ratio serves the purpose of long-term creditors.
Ratios may also be classified from the view point of users of accounting information. Thus, we can have the following groups of ratios.
1. From shareholders’ point of view:
There are certain ratios which serve the purposes of shareholders. Shareholders, in general, expect a reasonable return on their capital and reasonable capital appreciation. They are also interested in the safety of their investments.
The major point of interest to the shareholders is the profitability of the organization.
Example: Earnings per share, Return on Proprietor’s funds, etc.
2. From short-term creditors’ point of view:
Short-term creditors of a company are basically interested in knowing the company’s ability to pay its short-term liabilities as and when they become due. Hence, creditors place much importance on the liquidity aspects of the company’s assets.
Example: Current and Liquid ratios.
3. From long-term creditors’ and the Management point of view:
Leverage ratios provide useful information to long-term creditors. Long- term creditors include debenture holders, vendors of fixed assets and term- lending institutions. These creditors are primarily interested in the company’s ability to repay the principal sum and make periodical interest & payments as and when they become due. Besides, the management may use borrowed funds as a lever to improve earnings.
Example: Equity ratio serves the purpose of long-term creditors.