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Choose two (2) companies in the same industry and work on the criterion mentioned below:
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The capital structure of a company depends on the proportion of financing the company has done through debt and equity. The proportion of debt and equity that a company has with respect to its financing has a very good influence on the perception of investors with respect to the company.
Some of the key indicators which help in delineating whether the capital structure has adopted the right financial structure are given below.
Debt to Equity Ratio (D/E):
The ratio of the total debt to total equity of the company constitutes the debt to equity ratio. (Ross, 2013)
D/E Ratio=Total Debt/Total Equity
Interest Coverage Ratio of a company defines the capability of the company to pay the interest on the debt it has borrowed with the help of the operating income, before interest and taxes, that it has accumulated. (Ross, 2013)
The ratio of net income and equity constitutes the return on equity.
Earnings per Share shows the amount of capital that the investors earn for each share of the company that they hold.
EPS=Net Income/Total number of outstanding shares
P/E ratio indicates the ratio of Current Market Price of a company to the EPS of a company.
P/E= Current Market Price of a company/ EPS
If the P/E ratio of a company is higher, the company is believed to be a rapidly growing company and the earnings of the company are expected to be more in the future.