Decision Making by Stakeholders: Equity and Debt Holders

This article explains how equity and debt holders make decisions based on the financial statements of an organization. It covers the importance of ratio analysis, debt-equity ratio, and key performance ratios. The article also highlights the impact of stock buy-back on dividends and the significance of historical performance for debt holders. The ideal debt-equity ratio and the importance of liquidity are also discussed.

decision making by stakeholders
Equity and debt holders

Contents
Introduction...........................................................................................................................................3
Equity holder.....................................................................................................................................3
Debt holder........................................................................................................................................3
Conclusion.............................................................................................................................................3
References.............................................................................................................................................4

Introduction
Two major stakeholder groups use the information contained in the financial
statements are- equity holders and debt holders. Stakeholders makes their decisions according
to the facts and figures given in the financial statements. Debt holders check the liquidity of
the organisation through debt-equity ratio. The ideal debt-equity ratio is 2:1 but it differs
from industry to industry.
Equity holder
Equity shareholders decide whether to invest more or withdraw the existing
investment. They keep a check on the reserves and surplus. More retain earning can either
mean major expansion in coming years or shareholders may get disheartened because of
non- paying of dividends. As per annual report, 2017 of Oriental Interest Berhad the
company provides the service of stock buy-back but it will affect the dividend rate
because of reduction in total number of issued shares. Stockholders also affects the
business decisions as they have voting rights (Hamel, 2018). Before investing,
shareholders looks into the ratio analysis. EPS reflects the profitability of the
organisation. EPS measures how much earnings company has made in a financial year
after tax. It also depends on the nature of the shareholders. Shareholder who want regular
income demands dividends and calculates DPS is a straightforward amount which is
directly the income of the shareholder. It also focuses on how frequency the company
incurs bed debts. How frequently it gets the money from receivables.
Debt holder
Debt holders into consideration various ratio- current and quick ratios to determine
how quickly it encashes its current assets. Debt holders keep a check on interest coverage

ratio to determine how company pays its interest expenses on its outstanding loans. Debt
holders make decisions by watching the liquidity of the organisation. Debt is outside source
of finance for a company. To keep a view on the market reputation. So that, it can ensure that
it will get its money back with regular interest. If the company gets bankrupt, paying of
principal amount becomes difficult. The debt holder looks how much the company is
borrowing from the debt. If the majority part of organisation`s finance is debt. Debt financers
doubt on the ability of the organisation to pay regular interest. The debt-equity ratio should
not increase to 3:1 from ideal ratio 2:1. Debt holders keep a view how was the company
performing in last few years or the historical performance. It is important to know the extent
to which leverage finance its assets through loan. Debt holders also focuses on key
performance ratios like turnover ratios- account payable turnover ratio, Account receivable
turnover ratio (Valta, 2016).
Conclusion
Stakeholders take interest in the financial figures through ratio analysis. Various ratios
depicts different situations like earning per share, debt-equity ratio and also net asset value
ratio. It is important to analysis the financial statements because it gives an idea to the
investors to decide whether to invest the money or not. It is also important to the government
in assessing the taxes to be charged from the company.

References
Hamel, G. (2018). Do Stockholders Have a Say in Business Decisions?. Retrieved from:
http://smallbusiness.chron.com/stockholders-say-business-decisions-26260.html
Valta, P. (2016). Strategic default, debt structure, and stock returns. Journal of Financial
and Quantitative Analysis, 51(1).
Annual report, (2017). ORIENTAL HOLDINGS BERHAD. Retrieved from:
http://ohb.com.my/report/annualreport/OHB%20Annual%20Report%202017.pdf