Earnings per Share

The formula for Earnings per Share is:

Earnings per Share = (Net Income – Preferred Stock Dividends) / Average Common Shares Outstanding

Earnings per Share represent how much investors earn on their investment of common stocks in a company. This is important to investors as the only reason they are investing is to make money. The formula is rather tricky to use. Note that Preferred Stock Dividends must be subtracted from Net Income. This number is then divided by the Average Common Shares Outstanding. To determine the average: Take the number of stock outstanding at the beginning of the year and add the number of stock outstanding at the end of the year. This figure is then divided by 2 to arrive at the average value.

Solvency Ratios

Solvency ratios are used to measure a company’s ability to stay in business for a long period of time. While liquidity is looking at the current situation, solvency is looking at the long-term situation. 

One common solvency ratio:

Debt to Total Asset Ratio

The formula for Debt to Total Assets Ratio is:

Debt to Total Asset Ratio = Total Liabilities / Total Assets

Debt to Total Asset Ratio is used to examine the company’s long-term ability to meet obligations. Debt-financing is risky for any business as obligations have to be paid on a particular date in time. To utilize the formula take into consideration all liabilities whether short-term or long-term. For assets add up all the assets less depreciation that the company owns. 

Long-term debts are any debts that the company has that will be paid at some time in the future beyond the current year or operating cycle. 

Interpreting results: Higher ratios means the company has less equity. With a high ratio most of the assets are being financed with debt which in turn lowers the cushion that creditors have to collect on those liabilities.

Liquidity Ratios

Liquidity ratios determine the company’s ability to pay its current obligations. 

Before investing in a company, investors would like to know whether the company is profitable enough to pay their bills and dividends on time. This is a short-term measure of the company’s performance in terms of how much cash they have available and how much of their assets are being financed with debt. 

Accounting ratios

Accountants use various ratios to evaluate different aspects of a company. 

Three major types of ratios:

• Profitability Ratios—measures the profitability of a company over a period of time. 
• Liquidity Ratios—Evaluates the short-term ability of a company to meet its obligations.
• Solvency Ratios—Analysis the long-term viability of a company.

Each major group of ratios have different formulas some will have to be memorized, others your teacher may allow for the use of a cheat sheet. 

Ratios can be presented as a;

• Percentage 18% or 0.18
• Rate 0.18 times
• Proportion 0.18: 1

Current Liabilities

Current liabilities of a company include:
Accounts Payable, Notes Payable, Interest Payable, Wages Payable and other obligations the company expects to pay within the next year or current operating cycle, whichever is longer.

Current Assets

Current assets of a company include: 

Cash, Accounts Receivable, Inventories, Notes Receivable, and Short-term investments and other assets the company intends to convert to cash within the next year or current operating cycle, whichever is longer.

Debits and Credits in Accounting

In accounting, debits and credits have particular meanings.

If you have a bankcard you are accustomed to debiting your card when you make a purchase. Likewise you are accustomed to crediting your account by depositing money into the bank or making a payment on your account.

In accounting, this is not the meaning of debit and credits. Everyone gets confused because of a preexisting notion of what the words mean. The important point to remember is:

Debit means left as in the left side of the T-Account.

Credit means right as in the right side of the T-Account.

Sole Proprietor

The Sole Proprietor is the simplest form of business organization that is also the most popular due to its ease in establishing. However, the sole proprietorship affords the least protection from liabilities for the owner. Most small localized businesses are sole proprietorship such as beauticians, auto mechanics, carpenters, interior decorators, and landscapers. Sole proprietors generally exist as long as the owner has an interest in the business. This type of business organization lacks any true ability to sell or pass on to family members. The sole proprietor will also have difficulty finding financing as the owner is responsible for the debts of the business.

What is Current Ratio?

Current Ratio

Ratios are used to measure the performance of a company.

The Current Ratio is used to determine the liquidity of a company.
To determine the Current Ratio  divide Current Assets by Current Liabilities.

Current Ratio = Current Assets / Current Liabilities

Current assets are items that include cash or can be converted to cash in a short time such as inventory, accounts receivables, and notes receivable.

Current Liabilities are obligations that a company expects to pay within a short time. Current liabilities include accounts payable, and currently due notes payable among other obligations.


Why does it matter? A company's current ratio is an indication of their ability to pay upcoming expenses. A very low ratio means that the company is struggling to stay ahead of its debts and may not be able to cover them all in a  timely matter. Among current assets is cash, and when it comes to paying obligations, cash is king.