People looking at your business plan, particularly common and preferred shareholders will be interested in the overall performance of your business. These ratios offer a number of different ways to measure the success of your business to date. These are some of the important ones in business plans.

Earnings per share (EPS)

[ (Net Income – Preferred Dividends) / Number of Common Shares ]

Because the number of shares is not known, this ratio actually doesn’t mean anything on its own unless you related it to the Price Earnings ratio below.

Price earnings ratio

[ Market Price per Common Share / EPS ]

This ratio will be compared to the P/E ratio for the industry to see how profitably investors expect this company to be. Higher means that investors are expecting higher returns, but of course it is more risky because there is more to lose. For private companies, this ratio can be used to ballpark (very roughly) the share price of the business. Use the P/E ratio for the particular business sector (get it from the FTSE Actuaries Share Indices in the Financial Times) and multiply it by the EPS to get the Market Price per Common Share.

Return on Assets (RoA)

[ (Net Income + Interest After Tax) / Total Assets ]

This ratio is used to see how profitable the assets of this company are. If there is a low RoA, it may indicate that the business has high capital intensity, which means higher up front investments.

Return on Investment Capital (RoIC)

[ (Net Income + Interest After Tax) / (Equity + Long Term Liabilities) ]

This figure shows how much all the guys on the right side of the balance sheet (investors, creditors, shareholders, etc.) are getting on their investment. It will be compared to the industry.

Debt to Equity (D/E)

[ Total Liabilities / Equity ]

This ratio gives an idea of the capital structure of the business. Of course a high ratio indicates that the firm is highly leveraged, getting more of its funding from debt than equity.

Debt to Capital (D/C)

[ Long Term Liabilities / Long Term Liabilities + Equity ]

This is just another way of looking at the amount of debt compared to equity. A higher ratio might indicate a weaker position because of the cost of debt.

Tags: financial indicators, financial ratios, performance, ratio analysis
Categories: Lesson, Bachelor of Commerce, Entrepreneurship, Business