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Earnings per Share (EPS) are a financial measure that tells about net earnings of a shareholder over a period. In other words, EPS is part of profit distributed to the shareholder. EPS tells whether company can produce net profit for shareholders.It tells about financial health of a company. If EPS is high, it states that company is earning more profits and have ability to distribute those profits to shareholders. If EPS is low, it states that company earnings are not as expected.Categories of EPS are −Trailing EPS − Based on previous year’s numbers.Current EPS − Based on present or current ... Read More

SolutionThe solution is explained below −      EBITDA = Np+In+Ta+D+A    EBITDA = 175000+20000+35000+8000       EBITDA= 238000/-Here, Np=Net Profit, In=Interest, Ta=Taxes, D = Depreciation, A= Amortization      EBITDA= OI*+ D+ A    EBITDA = (525000-200000-95000) + 8000       EBITDA = 238000/-Here, OI* = Operating Income, D = Depreciation, A= Amortization(*Operating income (OI) = total revenue – cost of goods sold – operating expenses)      EBITDA Coverage Ratio = (EBITDA+LP)/ (IP+PP+LP)    EBITDA Coverage Ratio = (238000+15000)/ (5000+7500+15000)       EBITDA Coverage Ratio = (253000)/ (27500)          EBITDA Coverage Ratio = 9.2Here, LP = Lease payments, IP= Interest payment, PP = Principal payments.

EBITDA means Earnings before interest taxes depreciation and amortizations. EBITDA focus on operating decisions of a business by excluding non-operating decisions.Profitability between companies/industries can analysed by using EBITDA. A positive EBITDA means company is getting profits through its operations and a negative EBITDA means company is not getting profits through its operations and need to re adjust their operations to generate profits.Advantages of EBITDA are as follows −Easy to calculate.Commonly used to compare business valuations.Represents company’s operating performances.Reduces risk.Business growth can be estimated.Disadvantages of EBITDA are as follows −Capital expenditure is not considered.Not fall under GAAP.No particular procedure to calculate.By ... Read More

Earnings before Interest and Tax (EBIT) tell about profitability of a company. It tells about company’s core operation performance. Companies profit includes incomes, expenses.Sometimes EBIT is the amount which deducts all operating expenses from sales revenue, which is called operating income. EBIT is the amount generated in a particular accounting period.Formulasbases on TR, CGS, OEEBIT = TR-CGS-OEHere, TR = Total Revenue, CGS = Cost of Goods Sold, OE = Operating Expensebases on NI, In, TaEBIT = NI+In+TaHere, NI = Net Income, In = interest and Ta = taxesEBIT tells amount money earned by a company from its operations.Investors can compare ... Read More

The word trading means profit earning and equity means owner’s money. In other words, trade of equity means profit is earned through owner’s money. Company will go for trade on equity, when it needs new debt to gain or acquire new assets on which, it can earn high return as compared to normal interest on cost of debt. New debts are issued in the form of bonds, loans or preferred stocks.Objectives are described below −To operate its own trade.Increase rate of dividends.Control source of finance.Increase reputation of a company.Types are as follows −Tiny equity − Share capital is less than ... Read More

The major differences between Earnings per share (EPS) and dilute Earnings per share (D-EPS) are as follows −Earnings per share (EPS)Dilute Earnings per share (D-EPS)Basic earnings per equity share of a company is calculated.Calculates earnings per convertible share of a company.Main purpose is to calculate profitability of a company.Main purpose is to calculate profitability of a company which includes convertible securities.Less significance.More significance.Common shares are included in calculations.Common shares, preferred shares, debt etc. are included in calculations.More value of measure.Less value of measure.Easy to calculate.More complicated to calculate than EPS.Read More

Rs.Sales (S)1000000Variable cost (VC)375000Fixed cost (FC)95000Debt425000Interest on debt10%Equity capital590000SolutionThe solution is given below −return on investment = EBIT/ (D + E) return on investment = (S – VC – FC)/ (D + E) return on investment = (1000000 – 375000 – 95000)/ (425000 + 590000) return on investment = 530000/ 1015000 return on investment = 52.22%operating leverage (OL) = (S – VC)/ EBIT operating leverage = (1000000 – 375000)/ 530000 operating leverage = 625000/ 530000 operating leverage = 1.18financial leverage (FL) =EBIT/ EBT financial leverage = 530000/ (EBIT – I) financial leverage = 530000/ (530000 – (425000*10%)) financial leverage = 530000/ (530000- 42500) financial leverage = 530000/ 487500 financial leverage = 1.087combined leverage = OL * FL combined leverage = 1.18 * 1.087 combined leverage = 1.28Here,EBIT = Earnings before interest and tax.EBT = earnings before tax and after interest.I = interest on debentures.

Importance of financial ratios is as follows −By analysing and inspecting the previous results, ratio analysis can relate between different items.Ratio analysis can be used to prepare budget, can formulate policies and also used to plan future.Ratio analysis tells whether the firm is improving or not.Ratio analysis act as surveyor of efficiency.Inter firm comparison can be made.Tells about short term liquidity position.Long term solvency can be measured.With the help of ratio analysis, investors can analyse company’s financial statements to their interest.Determines profitability of a company.Operational efficiency can be analysed.Helps in understanding the business and financial risks of a company.Advantages of ... Read More

The major differences between temporary working capital and permanent working capital are as follows −Temporary working capitalIt’s the additional working capital to permanent working capital.Variable working capital.Dependent on variable factors.Sometimes increase/decreases (fluctuates from time to time) in nature.Financed through short term funds.Categorised into seasonal working capital and special working capital.Permanent working capitalIt’s the minimum capital to maintain in order to meet operational levels.Fixed working capital.Independent of variable factors.Stable in nature.Financed through long term funds.Categorised into Regular working capital and reserve working capital.

The major differences between net working capital and gross working capital are as follows −Net working capitalQualitative in nature.Tells about whether company can meet its operating expenses and its current liability.Net working capital is result of difference between current and current liability.Concept used in accounting system.Suitable for partnership firms and sole traders.Reveals company’s financial position.Companies net working capital increases when, there is increase in retained profits and sale of assets.Gross working capitalQuantitative in nature.Tells about overall amount at hand for financing current assets.Gross working capital is the result of sum of all current assets.Concept used in financial management.Suitable for companies.Financial ... Read More