WFU Law School
Law & Valuation
3.3.1 Income Statement Items

3.3.2 Income Statement Analysis

For most analytic purposes, information about past earnings and prospects of future earnings is more useful than information about property and assets. An old axiom is that assets are worth only what they can earn. Assets that have no earning capacity are salable only for scrap. Hence, more reliance is usually placed on the income statement ratios compared to the balance sheet ratios. Sometimes "income statement ratios" actually compare items on the income statement and the balance sheet.
Earnings per Share =
Net income / Outstanding shares
EPS is a fundamental measure of profitability and of particular interest to shareholders. It is often included in the income statement.
Return on Equity =
Net income / Net worth

ROE describes how much the company is earning on each dollar of shareholders' investment. When applied to GAAP statements, it allows rough comparisons between companies and even industries.

ROE is widely available for thousands of publicly held corporations. In 1986, the composite return on equity for the nation's 1,000 largest companies was 10.9 percent.

3.3.1 Income Statement Items

©2003 Professor Alan R. Palmiter

This page was last updated on: March 21, 2004