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This note contains a summary of the more common financial statement ratios. A few points should be noted: • Calculations vary in practice; consistency and the intuition underlying the calculated ratio are important.
Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time.
Net Income - Preferred dividends Outstanding number of common shares The price that investors are willing to pay per $1 of Price earnings (P/E) ratio = earnings Share price Earnings per share (EPS) Total price that investors are willing to pay for a P/E ratio (company wide) = company's Net income Market capitalization Net income
The interest coverage ratio shows how easily a company can pay its interest expenses: Interest coverage ratio = Operating income / Interest expenses. The debt service coverage ratio reveals how easily a company can pay its debt obligations: Debt service coverage ratio = Operating income / Total debt service.
explains the calculation and interpretation of common size balance sheets as well as common size income statements. This Chapter also defines a wide variety of ratios derived from financial statement information.
• Ratios provide a common means for comparing the financial strength and performance of two or more companies. • Ratios can reveal a company’s financial strength or weakness as well as reveal trends about business conditions and profitability. • Formulas for 16 commonly used ratios are explained.
Commonly used components of some FPR ratios are defined below to simplify the formulas described in the Key Ratios, Supplemental Ratios and Historical Ratios sections of this guide. Total Assets for the current period + Total Assets for the prior year-end, ÷ two.
