Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)
Net income $141.7 $333.0
Add income tax expense 79.4 90.3
a. Add interest expense 0 15.0
b. Amount available to meet interest charges $221.1 $438.3
Number of times interest charges earned (b ÷ a) NA 29.2Again, we see that the number of times interest earned ratio for Pixar does not apply,
because it has no interest expense. DreamWorks’ ratio is 29.2, which would be con-
sidered excellent interest charge coverage.Leverage Summary
We began this section by noting DreamWorks’ advantageous use of positive leverage.
However, since there are limits to the use of leverage, we next asked if DreamWorks
used too much leverage. After reviewing the additional leverage ratios in this section,
DreamWorks’ use of leverage is clearly not too aggressive. Pixar, on the other hand, is
not using leverage as aggressively as it might. By avoiding debt, Pixar is forgoing the
advantages to the stockholders in using leverage.STOCKHOLDER RATIOS
The analytical approaches in the previous sections help shareholders and managers an-
alyze the financial statements of companies. In this section, we will describe and illus-
trate analytical approaches used by shareholders to evaluate the stock price and/or
dividend performance of their equity investments. The stock price and dividends on
the common stock are the primary means by which an investor earns a return. Thus,
additional ratios that relate to stock price and dividend information are of interest to
shareholders. Three common shareholder ratios are earnings per share, the price-
earnings ratio, and dividend yield.Earnings per Share
One of the profitability measures often quoted by the financial press is earnings per
share (EPS). It is also normally reported in the income statement in corporate annual
reports. If a company has issued only one class of stock, the earnings per share is com-
puted by dividing net income by the number of shares of stock outstanding. If pre-
ferred and common stock are outstanding, the net income is first reduced by the
amount of preferred dividend requirements.^5
The data on the earnings per share of common stock for Pixar and DreamWorks
are as follows:Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)
Net income $141.70 $333.00
Shares of common stock outstanding ÷ 56.76 ÷ 81.43
Earnings per share on common stock $ 2.50 $ 4.09650 Chapter 14 Financial Statement Analysis
Calculate and interpret
shareholder ratios:
earnings per share, price-
earnings ratio, and divi-
dend yield.5
5 Additional details related to earnings per share were discussed in Chapter 12.