Final answer:
Financial ratios are tools that stakeholders use to assess various aspects of a company’s financial health, including its ability to meet short-term obligations, efficiently manage assets, maintain an appropriate level of debt, and generate profits. John would focus on liquidity ratios, Dan on activity ratios, Cynthia on debt ratios, and Rachel on profitability ratios.
Step-by-step explanation:
Matching the requirements of external and internal users of financial statements with the types of ratios they might use involves understanding the different financial metrics that cater to various user needs:
- John, the CEO of JSL Inc., who wants to know whether JSL will meet its short-term obligations, would be most interested in liquidity ratios. These ratios, like the current ratio and quick ratio, measure the company's ability to cover its short-term liabilities with its short-term assets.
- Dan, an investor interested in the company’s management efficiencies, would look at activity ratios. Activity ratios, which include inventory turnover and accounts receivable turnover, help analyze how well a company manages its assets to generate sales and maximize profitability.
- Cynthia, who wants to invest in companies with a low financial leverage ratio, is referring to debt ratios. These ratios, such as the debt-to-equity ratio, assess the extent to which a company is financing its operations through debt versus wholly owned funds.
- Lastly, Rachel wants to assess overall company performance, which would be summarized by profitability ratios. Ratios like return on assets (ROA) and return on equity (ROE) provide insight into how effectively a company's management is using its assets to generate earnings.
Each type of ratio provides a different lens through which financial capital and its relationship with profits, borrowing, bonds, and stocks can be understood. Financial capital is crucial for a company's operations and expansion, and it can be sourced through equity, debt, or reinvested earnings. The selection between these sources usually depends on factors such as the cost of capital, the company's stage of development, and the desired balance between debt and equity.