The starting point in any analysis of a corporation’s borrowed and equity capital is a careful reading of the descriptions provided in the body of the financial statements and the accompanying footnotes. As you have seen in this chapter, terms such as convertible, cumulative, preferred, and many others are critical in understanding the relative rights and priorities of the debt and equity claims on corporate assets.
The number and type of financial ratios that are based on shareholders’ equity are constrained only by the imagination of the analyst. New ratios are continually being developed and tested by the “gurus of the day” quoted in the business press. This section discusses three ratios that seem to have stood the test of time: the financial leverage ratio, the market-to-book value ratio, and the price-to-earnings ratio.
Ratios in Shareholders’ Equity