SUBMITTED BY:

Rajeel Ahmad (B-27418)

Course Name:
FINANCIAL ACCOUNTING
Assignment: 1
Shareholders vs. Stakeholders:
Shareholders are individuals or entities that own shares in a company
and therefore have ownership interests. They are typically concerned
with the company's profitability and stock performance as these factors
affect the value of their investments.
Stakeholders, on the other hand, are a broader group. They include not
only shareholders but also employees, customers, suppliers, local
communities, and society at large. Stakeholders are interested in various
aspects of the company, such as its ethical practices, impact on the
environment, and contribution to the community.
Importance of Ratios: Financial ratios are used to analyze various
aspects of a company's financial performance and are crucial for several
reasons:
Comparative Analysis: Ratios allow for easy comparison between
different financial metrics. For instance, comparing the debt-to-equity
ratios of two companies can provide insights into their capital structures
and financial risk.
Trend Analysis: Ratios help in tracking a company's performance over
time. Analyzing ratios over several years can reveal trends and patterns,
indicating the company's financial stability and growth prospects.
Decision Making: Ratios assist in decision-making processes, such as
investment decisions or lending decisions by banks. Investors and
creditors often use ratios to assess the financial health of a company
before making investment choices.
Identifying Strengths and Weaknesses: Ratios highlight a company's
strengths and weaknesses in different areas, such as liquidity,
profitability, and efficiency. This information is valuable for strategic
planning and operational improvements.
Forecasting: By analyzing historical ratios and trends, analysts can
make informed predictions about a company's future performance. This
aids in long-term planning and strategy development.
Ratios vs. Raw Numbers for Analysis: Using ratios instead of raw
numbers provides several advantages:
Standardization: Ratios standardize the financial figures, making it
easier to compare companies of different sizes or in different industries.
Raw numbers might be misleading in such comparisons.
Simplification: Ratios simplify complex financial data into
comprehensible, comparable, and actionable metrics. They distill vast
amounts of information into key indicators.
Insightful Analysis: Ratios provide insights into relationships between
different financial variables. For example, the return on equity (ROE)
ratio indicates how efficiently a company is utilizing shareholders'
equity to generate profits. This insight is not apparent from raw numbers
alone.
Holistic View: Ratios often involve multiple financial variables,
providing a holistic view of a company's performance. For instance, the
current ratio (current assets divided by current liabilities) considers both
assets and liabilities, giving a broader perspective on a company's
liquidity.
In summary, ratios are essential tools for financial analysis because they
offer standardized, simplified, insightful, and holistic perspectives,
enabling analysts to make informed decisions and strategic
recommendations.