Question

why are these ratios important (net operating working capital, total net operating capital, net operating profit after taxes, free cash flow, and return on invested capital )? Who are three users of these ratios and what are they used for?

Answer 1

These ratios are important because

1. They give an insight into the liquidity position of the business. The net operating working capital helps in understanding whether the business has adequate capital to run its operations

2. Net operating profit after tax helps in analysing the costs. It can help the company as to what is the profitability and the profit margin and how it can improve the same

3. The cash flows help in determining what is the free cash flow the business is able to generated on a per share basis and is this good enough for running the business in the long run

4. The return on invested capital throws light on what investors can expect by investing the money in the business.

The three important users of ratios are:

1. The managers of the business

2. The Investors

3. The creditors