Professional Documents
Culture Documents
+ =
Equity
Debt
X debt of Cost ROA ROA ROE
Ratios: An Integrated Analysis
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ROE can be desegregated as follows:
Equity
Assets
X
Assets
Sales
X
Sales
Income
Solvency X Activity X y of itabilit ROE
=
=Pr
Ratios: An Integrated Analysis
A2 - 57
Ratio Analysis :
Earning Per Share and Other Valuation Model:
Earning Per Share (EPS):
Earning per share is probably is the most commonly used corporate
performance statistic for publicly traded firms. It is used to compare
operating performance and for valuation purposes either directly or
indirectly or together with market prices in the familiar form of
price/earnings (P/E) ratio.
A2 - 58
Earning Per Share and Other Valuation Model, cont.
Simple Capital Structure: The firm that has only common shares,
the computation of EPS is relatively straightforward as follows:
OR,
ding Outs Shares n erageCommo WeightedAv
Shares ForCommon Available Earning
BasicEPS
tan
=
ding outs shares n erageCommo Weightedav
idend eferredDiv NetIncome
BasicEPS
tan
Pr
=
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Complex Capital Structure:
Companies whose have options and convertible securities are said
to have complex capital structures. These firms must recognize the
potential effect on EPS upon the conversion of those securities if
such a conversion will result in dilution of EPS.
ding Outs Shares Common Potential and Common
Shares Common for Income Adjusted
DEPS
tan
=
Earning Per Share and Other Valuation Model, cont.
A2 - 60
The adjustment to the numerator reflect the fact that if the
convertible securities were converted to common shares, interest
and preferred dividend payments would no longer have to be made
to those security holders, increasing the amount available to
common shareholders.
Numerator adjustment therefore include:
1. Dividends on convertible preferred shares
2. Interest (after-tax) on convertible debt
3. Effect of the change resulting from 1 and 2 on profit sharing or
other expenses.
Earning Per Share and Other Valuation Model, cont.