Definition
The times preferred dividends earned measures a company's ability to meet its preferred dividend payments to shareholders. This financial ratio only requires two inputs, net income and the company's annual preferred dividends paid, both of which can be found on the company's income statement.
Calculation
Times Preferred Dividends Earned = Net Income / Preferred Dividends
Explanation
Also known as preferred dividends coverage, times preferred dividends earned is the primary measure of safety for a preferred stockholder. Holders of common stock are also interested in this measure, since dividends are usually paid to holders of preferred stock before common stockholders.
Preferred stockholders usually purchase these securities because they are interested in the yield on their investment. Times preferred dividends earned allows these stockholders to understand how much net income is available relative to the required preferred dividends paid.
As a general rule, investors would like to see the times preferred dividends earned value to be as high as possible. When drawing conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.
Example
Company A's income statement indicates net income of $4,283,000 and preferred dividends of $306,000. Company A's times preferred dividends earned would be:
= $4,283,000 / $306,000, or 14.0
Related Terms
leverage ratio, liquidity ratios, debt ratio
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