CHAPTER 8 Analysis and interpretation of financial statements 381Ratio Calculation Interpretation
Capital structure ratios
Debt to equity
ratio
Total liabilities
× 100
Total equityMeasures the dollar of liabilities
per dollar of equityDebt ratio Total liabilities
× 100
Total assets
Measures the dollar of liabilities
per dollar of assetsEquity ratio Total equity
× 100
Total assets
Measures the dollar of equities
per dollar of assetsInterest coverage
ratio
EBIT
Net finance costsMeasures the ability of the entity
to meet its net finance costs out of
current year’s profits before interest
and taxDebt coverage
ratio
Non-current liabilities
Net cash flows from operating activitiesMeasures the payback period for the
coverage of long-term debtMarket performance ratios
Net tangible
asset backing
per share
Ordinary shareholders’ equity − Intangible assets
Number of ordinary shares on issue at year-endMeasures the value of tangible assets
(as reported in the balance sheet) per
ordinary share on issueEarnings per
share
Profit available to ordinary shareholders
Weighted number of ordinary shares on issueMeasures the profit generated for
ordinary shareholders per ordinary
share on issueDividend per
share
Dividends paid or provided to ordinary
shareholders in the current reporting period
Weighted number of ordinary shares on issueMeasures the dividend declared or paid
to ordinary shareholders per ordinary
share on issueDividend payout
ratio
Dividends per share
Earnings per shareMeasures the percentage of current
period’s profits declared or paid as
dividendsOperating cash
flow per share
Net cash flows from operating activities −
Preference dividends
Weighted number of ordinary shares on issueMeasures the operating cash flows
generated per ordinary share on issuePrice earnings
ratio
Current market price
Earnings per shareMeasures the number of years of
earnings that the market is capitalising
into share price