Financial Ratios and Analysis

Question 1

What is the formula to compute EPS and Diluted EPS?

Answer 1

EPS: (Net Income - Preferred Stock Dividends)/Average OS Common Shares

Diluted: (Net Income - Preferred Stock Div) / (WA Shares OS - impact of convertible securities - impact of options, warrants, and other dilutive securities)

Question 2

What is the formula for average collection period (AR)?

Answer 2

Days in Period * Avg. AR / Net Credit Sales for period

Question 3

What is the Times Interest Earned Ratio and what is its purpose?

Answer 3

EBIT/Interest Expense
Used to determine how many times a company can cover interest charges on a pretax basis.

*Note that Investopedia claims Total Interest Payable for bonds and other contract debt in denominator.

Question 4

When calculating EPS, what is subtracted from the net income figure in the numerator of the formula? How is that figure determined?

Answer 4

Preferred Stock Dividends are deducted from net income in the numerator:

(NI-PSD)/Avg CS OS

Preferred Div are calculated as (par valueshares % provided in details)

Question 5

How are weighted average shares outstanding computed (EPS)?

Answer 5

They are weighted by the number of months the shares were outstanding during the year.

Question 6

When there has been a stock split, what is the effect on computations of EPS?

Answer 6

The split is retroactively applied to the weighted average shares outstanding for EPS calculation. IE, a 2-for-1 split will result in double the shares in PY for determining EPS.