What financial ratios are relevant when using equity value as the numerator?

When evaluating equity value, the relevant financial ratios involve metrics that reflect the profitability attributable to shareholders. Net income directly represents a company's profit after all expenses, taxes, and costs have been deducted from total revenue. Earnings per share (EPS) builds on this by dividing net income by the number of outstanding shares, providing insight into the profitability for each share owned by shareholders. Both of these metrics are crucial in determining the value of equity since they represent the earnings performance that equity holders can expect.

Other financial ratios, while informative, are not as directly connected to equity value. EBIT and EBITDA focus on operational performance without considering capital structure and do not represent shareholder value directly. Unlevered free cash flow and revenue do provide insights into the company’s operational efficiency and potential cash generation, but they do not capture the direct benefits accruing to equity holders in the same way net income and EPS do. Debt ratios and liquidity ratios focus on the company’s financial health and ability to meet obligations, which is important but does not tie directly into the analysis of equity value in the same manner as net income and earnings per share do.