Government officials are generally concerned that reporting and valuation regulations have been complied with -- and that taxable income is fairly represented. Labor leaders pay particular attention to sources of increased wages and the strength and adequacy of pension plans (which tend to be chronically underfunded). Owners, shareholders and potential investors tend to be most interested in profitability. Many investors look for a high payout ratio (cash dividend/net income). Speculators pay more attention to stock value insofar as growth companies tend to have a low payout ratio because they reinvest their earnings. Bondholders are inclined to look for indicators of long-run solvency. Short-term creditors, such as bankers, pay special attention to cash flow and short-term liquidity indicators, such as current ratio. Both classes of creditors prefer lending to firms with low (usually no higher than 40-50%) leverage ratios, such as debt to total assets.
As indicated earlier, management can use financial statements for diagnostic purposes -- with different managers paying attention to different ratios. A buyer may look closely at inventory turnover. Too much inventory may mean excessive storage space and spoilage, whereas too little inventory could mean loss of sales and customers due to stock shortages. A credit manager may be more interested in the accounts receivable turnover to assess the correctness of her credit policies. A high sales-to-fixed-assets ratio reflects efficient use of money invested in plant and in other productive or capital assets. Higher levels of management, as with investors, tend to look at overall profitability ratios as the standards by which their performance is judged [Tamari,1978].
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