7.8: Adjustments to Basic Financial Ratios for Companies That Have Preferred Stock

Most companies do not issue preferred stock, but when a company does have preferred shares on its balance sheet, certain adjus t ments need to be made to some of the financial ratios, as was presented on the foregoing pages.

For the example just given (Balance Sheet and Income Statement), here are the relevant adjustments. The basic idea is that the preferred shareholders come first, before the common shareholders. Therefore, income “available” to common shareholders must be adjusted. As you will note, this new figure affects other data and ratios. A summary table follows.

The following page exhibits visually the effect of Preferred Stock on Earnings Retention.