Business – 10.2 Analysis of published accounts – Profitability ratios | e-Consult
10.2 Analysis of published accounts – Profitability ratios (1 questions)
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Answer:
- Owners/Shareholders: Profitability determines dividend payments and the potential for capital growth. High profits increase share value and provide funds for reinvestment, influencing decisions such as expansion, product development, or mergers.
- Creditors: Lenders assess profitability to gauge a firm’s ability to meet interest and principal repayments. Consistently profitable firms are granted better credit terms, affecting decisions on borrowing levels and financing structures.
- Employees: Profitability underpins wage growth, bonuses, and job security. A profitable business can invest in training, improve working conditions, and offer performance‑related incentives, shaping HR strategies and morale initiatives.
- Potential investors: Prospective investors use profitability metrics to evaluate return on investment and risk. Strong profitability attracts equity investment, influencing the firm’s capital‑raising strategy and its ability to pursue long‑term projects.
Overall, profitability acts as a central driver for strategic choices, guiding resource allocation, risk management, and growth planning across all stakeholder groups.