IT is the reporting season for some of Hong Kong's biggest companies. Understanding some of the key terms used by companies will help in evaluating whether to invest.

Profitability: Profit expressed as a percentage of the capital employed in a company. This enables investors to assess whether the company is using its capital effectively.

John Clutterbuck, a partner at Price Waterhouse, said: 'If two companies both have profit of $1 million, and if the share capital of one company is $5 million and the other $10 million, then obviously the profit is stronger in the $5 million company.' Liquidity: A measure of whether the company has sufficient funds to meet financial commitments as they fall due.

This often is expressed by taking current assets as a percentage of current liabilities, or current assets, less stock, as a percentage of current liabilities.

A company may be making profits but if it is unable to meet its debts because of liquidity problems, it could still become insolvent.

Mr Clutterbuck, said: 'This is very important as it insures that a company has funds to meet its liabilities.' Gearing: The mixture of borrowing and share capital being used to finance the business.

Earnings per share: Profits per ordinary share. This reflects the maximum dividend which could be paid if part of the profits were not reinvested in the company. Calculated as profits divided by the number of shares.

Earnings yield: Earnings per share divided by price per share. Effectively shows the return the investor is making on his investment in the company.

Price-earnings ratio: Price per share divided by earnings per share. Otherwise known as P/E ratio. A measure of the earnings the investor is making on his investment, effectively an indication of the number of years' earnings the investor has purchased.

Dividend yield: Dividend divided by share price. A measure of the cash return each investor receives on his investment.

Dividend cover: Earnings divided by dividend. Assesses the likelihood of whether management will reduce the dividend from its current level. The higher this amount, the less likely the dividend is to fall.

Mr Clutterbuck warned against looking at the ratios in isolation.

ncG1vNJzZmivp6x7tK%2FMqWWcp51krrPAyJyjnmdhZ4N5hZRomqiloJa7unnRnqeoqqRitaK6w7JkoK2ZmbJutc2vnKysn6fA