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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

 
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