Final answer:
Investors usually consider a firm's cash flows as the most critical factor when making an investment decision, as it signals the company's ability to earn and manage money effectively. Retained earnings, dividend history, and liquidity ratios like the current ratio are also important but secondary factors.
Step-by-step explanation:
When making an investment decision, investors often prioritize a firm's cash flows because they reflect the company's ability to generate earnings and maintain solvency. A firm's retained earnings indicate how much profit is reinvested back into the business and can be a sign of growth potential, whereas previous dividend payments can suggest a history of providing shareholder returns. Nevertheless, the current ratio is a liquidity metric and while important, it is typically of less immediate concern compared to ongoing cash flows.
Decisions on whether to issue stock, pay dividends, or reinvest profits are fundamentally strategic and are made by the management of both private and public firms. These decisions deeply impact the financial strategy and structure of a company, which investors consider when evaluating investment opportunities. Investors often look for a balance between short-term profitability and long-term growth potential.