CAPITALIZATION
The term capitalization refers to the sources and makeup of the company's financial picture. The following are used to determine the company's capitalization:
• Long-term debt
• Equity accounts, including par value of common and preferred and paid in and earned surplus.
A company that borrows a large portion of its capital though the issuance of bonds is said to be highly leveraged. Raising money through the sale of common stock is considered to be a more conservative method for a corporation to raise money because it does not require the corporation to pay the money back. When a company borrows funds, it is trying to use that borrowed capital to increase its return on equity.
A fundamental analyst may look at the balance sheet to determine the following financial information:
• Net worth
• Working capital
• Current ratio
• Quick assets
• Acid-test ratio/quick ratio
• Cash assets ratio
• Debt-to-equity ratio
• Common stock ratio
• Preferred stock ratio
• Bond ratio
|
Measure |
Formula |
Purpose |
|
Book value per share |
(assets - liabilities -intangibles - par value of preferred)/number of outstanding common shares |
To determine the value of the company's common stock |
|
Working capital |
current assets - current liabilities |
To determine the company's liquidity |
|
Current ratio |
current assets/current liabilities |
The relationship between current assets and liabilities |
|
Quick assets |
current assets -inventory |
To determine highly liquid assets |
|
Acid-test ratio/quick ratio |
quick assets/current liabilities |
To determine the company's liquidity |
|
Cash assets ratio |
cash & equivalents/ current Liabilities |
The most stringent liquidity measure |
|
Debt-to-equity ratio |
total long-term debt/ total shareholders' equity |
To examine the company's capital structure |
|
Common stock ratio |
common shareholders' equity/total capitalization |
To examine the company's capital structure |
|
Preferred stock ratio |
preferred stock/total capitalization |
To examine the company's capital structure |
|
Bond ratio |
total long-term debt/total capitalization |
To examine the company's capital structure |
