What are financial attributes? Definition and examples
Financial attributes are the parameters of a company that show how financially healthy it is. Financial attributes are the factors that suggest how well a business is doing and whether it is in good shape.
Put simply; financial attributes measure the financial health of a business.
Investors, regulators, and security analysts use financial attributes to evaluate a company’s performance against its industry average. They also compare a company’s current attributes with its previous ones.
The Law Dictionary has the following definition of the term:
“Factors that show the health of a company. It can be equity, capitalization ratios, capital requirements, and earnings per share.”
Financial attributes – factors
The following factors or parameters make up the financial attributes of a company: earnings per share, capital requirements, and capitalization ratios. Interest coverage ratios and common equity are also factors that tell us how healthy a business is.
Financial attributes – earnings per share
Earnings per share or EPS is the amount of money that a business allocates to each outstanding share of common stock. In this context, the words ‘stocks’ and ‘shares’ have the same meaning. Hence, the term ‘stocks and shares.’
We calculate EPS by subtracting dividends from profit and dividing the result by the total number of outstanding shares.
Let’s suppose a company earned $10 million in one year after paying out dividends. The company had 10 million common shares of stock outstanding. Therefore, its EPS should be $1 per share.
$10,000,000 earned ÷ 10,000,000 shares = $1 per share
Financial attributes – capital requirement
A company’s capital requirement is how much money it needs to achieve its goals and objectives. In other words, how much money it requires until the business is on its feet, i.e., up and running.
According to SmartBusinessPlan.com:
“You can calculate the capital requirements by adding founding expenses, investments and start-up costs together.”
“By subtracting your equity capital from the capital requirements, you calculate how much external capital you are going to need.”
Financial attributes – capitalization ratios
Capitalization ratios tell us what proportion of a company’s capital structure consists of debt. We also call them the ‘cap ratios.’
These ratios include the debt-to-capitalization ratio, debt-equity ratio, and long-term debt to capitalization ratio.
The capitalization ratio, for example, tells us to what extent a business is using debt to fund its operations. It also tells us how much of its expansion plans it will fund with debts.
Financial attributes – common equity
Common equity, common stock, or common shares are a type of company share. When a company pays out dividends, the preferred stock owners get their money first, and then the common stock owners.
If a company goes bankrupt, its creditors, bondholders, and preferred stockholders get any remaining funds. Then, whatever is left goes to the common equity holders.
Even though common equity is riskier than preferred stocks, common equity is more popular. It is more popular, because, on average, common stocks perform better than preferred stocks.
Financial attributes – interest coverage ratio
A company’s interest coverage ratio tells us how easily it can pay the interest on its outstanding debts.
We calculate this ratio by dividing the company’s EBIT by its interest expenses for a specific period. EBIT stands for earnings before interest and taxes.
The lower a company’s interest coverage ratio is, the greater is its debt expense burden.
Many investors and analysts see a ratio of 1.5 or lower as an alarm bell. It means that the company may struggle to meet interest expenses.