Finance Formulas / July 19, 2018 / Tatiana Douglas
According to DuPont analysis, there are three major financial metrics drive return on equity (ROE): operating efficiency, asset use efficiency and financial leverage. Operating efficiency is represented by net profit margin or net income divided by average shareholders' equity. Asset use efficiency is measured by total asset turnover or the asset turnover ratio. Finally, financial leverage is analyzed through observation of changes in the equity multiplier.
The formula for debt-service coverage ratio requires net operating income and total debt service of the entity. Net operating income is a company's revenue minus its operating expenses, not including taxes and interest payments. It is often considered equivalent of earnings before interest and tax (EBIT). Some calculations include non-operating income in EBIT, however, which is never the case for net operating income. As a lender or investor comparing different companies' credit-worthiness – or a manager comparing different years' or quarters' – it is important to apply consistent criteria when calculating DSCR. As a borrower, it is important to realize that lenders may calculate DSCR in slightly different ways.
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