Wholesalers tend to be characterized by large inventories, large sales volume (with small profit margin) and chronic credit problems with retailers. Manufacturers tend to have a substantial investment in fixed assets (machinery, equipment and buildings) and often face major problems due to a large work-force [Costales,1979]. Service industries -- such as railroads, airlines and public utilities -- have less of a problem with flow of inventory. Their focus tends to be on balancing operating revenue against operating expenses dominated by fixed assets (depreciation, repairs, replacement, maintenance, etc.). Companies with high proportions of current assets tend to be financed through short-term borrowing and shareowner investment. Industrial corporations tend to be financed primarily through shareowners, whereas public utilities and railroads are more often financed by long-term borrowing (bonds) [Holmes, et al,1970]. .
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.
