This lesson covers the analysis of financial statements and the key ratios used to evaluate financial performance and value.

2.1 Balance Sheet Structure
The balance sheet is structured into assets, liabilities, and equity :

  • Assets: Resources owned by a company expected to generate future economic benefits.

  • Liabilities: Obligations the company owes to external parties.

  • Equity: The residual interest in the assets after deducting liabilities.

2.2 Financial Ratios
Key financial ratios are used to analyze firm performance and capital structure :

  • Return on Capital Employed (ROCE): A measure of a firm’s efficiency in generating profits from its capital employed, calculated as EBIT × (1 – tax rate) divided by capital employed .

  • Price-to-Earnings Ratio (PER): Compares a company’s stock price to its earnings per share (EPS), reflecting investor expectations about future earnings growth .

  • Earnings Per Share (EPS): Net income divided by the number of shares outstanding, a key indicator of company profitability .

  • Dividends Per Share (DPS): Total dividends paid divided by the number of outstanding shares .

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