E.P.S;

P/E ratio;

E.B.I.T;

Debt :Equity

EPS

"EPS" refers to earnings per share. It is calculated after deducting interest and taxes payable from the operating profit (EBIT), as also dividend, if any, on preference shares. The residual amount represents the earning available to common shareholders. If this amount is divided by the number of shares of equity outstanding, EPS is calculated. It is the objective of a business to maximize earnings per share, through the process of financial leverage or trading on equity. This brings in the maximum return to the shareholders and makes the stocks of the company high-valued. Financial leverage involves the use of fixed-cost financing. Favourable financial leverage is said to occur when the company uses funds obtained at a fixed cost (funds obtained by issuing debt with a fixed interest or preferred stock with a constant dividend rate) to earn more than fixed financing costs paid. Any profits left after meeting fixed financing costs then belong to the common shareholders. Unfavourable or negative leverage occurs when the firm dos not earn as much as the fixed financing costs. Thus if a company raised Rs.20 Lacs of debt capital and incurs capital cost of Rs.5 Lacs on the same, but is able to earn an incremental profit of Rs.15 Lacs therefrom, it is having favourable financial leverage of Rs.10 Lacs. But if it incurs a cost of Rs.10 Lacs and earns only Rs.8 Lacs incrementally therefrom, it is a case of unfavourable financial leverage

P/E Ratio

Price-earnings Ratio is an important valuation ratio. These ratios indicate how the equity stock of the company is assessed in the capital market. Since the market value of equity reflects the combined influence of risk and return, valuation ratios are the most comprehensive measures of a firm's performance.

P/E Ratio is calculated:

The market price per share may be the price prevailing on a certain day, or preferably the average price over a period of time. The earnings per share is simply: profit after tax divided by number of outstanding equity shares

The price earning ratio or (price earning multiple as it is commonly referred to) is a summary measure, which primarily reflects the following factors: growth prospects, risk characteristics, shareholder orientation, corporate image, and degree of liquidity.

E.B.I.T

EBIT refers to earnings before interest and taxes and represent the operating profits generated by a business. Since interest and taxes represent not operating expense, but financial charges, these expenses are excluded in calculating operating profit. A business can improve its operating profits or EBIT through operating leverage. Leverage refers to the use of fixed costs in an attempt to increase profitability. Operating leverage arises due to fixed operating costs in the production of goods and services. Fixed costs are those, which do not vary with sales volume. They are a function of time and are typically contractual (e.g. rent paid for factory premises). Operating leverage occurs any time a firm has costs that has to be met any time regardless of sales volume. In other words with fixed costs remain constant the percentage of change in profits accompanying a change in volume is greater than the percentage of change in volume. The occurrence of operating leverage maximises EBIT.

Example: A firm sells its products for Rs.100 per unit, has a variable cost of Rs.50/- per unit and fixed operating cost of Rs.50,000/- per year. When its sales level is 2000 units its EBIT is Rs.50,000/- (sales revenue minus variable & fixed costs). If the products sold is increased to 3000 from 2000, there is no increase in the fixed cost, and there is increase of Rs.50,000 only in variable costs against incremental sales of Rs.100,000. Thus the operating profits increases to Rs.1 Lacs (from Rs.50,000/-). This is a case of favourable operating leverage. On the other hand if the sales revenue is reduced to 1000 units from 2000 units, sales revenue is reduced by Rs.1 Lac, against reduction of variable cost by Rs.50,000/- and hence it makes neither profit or loss. This is a case of negative operating leverage.

Debt : Equity

Debt-equity ratio is an important leverage ratio. Financial leverage refers to the use of debt finance. While debt capital is a cheaper source of finance, it is also a riskier source. Leverage ratio helps in assessing the risk arising from the use of debt capital. One type of leverage ratio is structural ratio, which are based on the proportion of debt and equity in the financial stricture of the firm. (The type is coverage ratio). Debt-equity ratio is an important structural ratio.

Debt-equity ratio is expressed as

The numerator consists of long term liabilities and denominator consists of net worth plus preference capital. In general the lower the debt/equity ratio, the higher the degree of protection enjoyed by the creditors, due to higher stake of the promoters in the venture