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Key Investment Ratios Explained

This document defines and explains several key investment ratios used to analyze companies: - Earnings per share (EPS) relates a company's profits to outstanding shares - Price/earnings (P/E) ratio relates share price to EPS as a measure of investor confidence - Dividend per share relates total dividends to shares receiving dividends - Dividend yield compares dividends to share price to measure investment return - Dividend payout and cover ratios measure how much profit is paid to shareholders vs. reinvested - Total shareholder return considers dividends and change in share price for a full return analysis

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Sayantan Khamrui
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28 views9 pages

Key Investment Ratios Explained

This document defines and explains several key investment ratios used to analyze companies: - Earnings per share (EPS) relates a company's profits to outstanding shares - Price/earnings (P/E) ratio relates share price to EPS as a measure of investor confidence - Dividend per share relates total dividends to shares receiving dividends - Dividend yield compares dividends to share price to measure investment return - Dividend payout and cover ratios measure how much profit is paid to shareholders vs. reinvested - Total shareholder return considers dividends and change in share price for a full return analysis

Uploaded by

Sayantan Khamrui
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

RATIO ANALYSIS

• Investment ratios
– Earnings per share (EPS)
– Price/Earnings (P/E) ratio
– Dividend per share
– Dividend yield
– Dividend payout
– Dividend cover
EARNINGS PER SHARE (EPS)
Earnings per share (EPS)
= Profits available to ordinary shareholders
Weighted average number of ordinary shares in issue

1. EPS relates the profits generated by the company, and


available to equity (ordinary) shareholders, during
the period to the number of equity (ordinary) shares in
issue
2. The profits available to ordinary shareholders will be
the net profit after tax and less any preference
dividend
3. It is always expressed in pence per share and forms
part of the P/E ratio (next ratio)
PRICE/EARNINGS (P/E) RATIO
Price/earnings ratio = Market price per share
Earnings per share
1. P/E ratio relates the market value of a share to the
earnings per share
2. It is a measure of market confidence (or investors
confidence) in the future of a company
3. The higher the P/E ratio, the greater the confidence in
the future earning power of the company
4. It is expressed as a multiple of EPS (i.e. number of
times over EPS)
DIVIDEND PER SHARE
Dividend per share
= Total dividend
Number of shares receiving the dividend

1. It is usually disclosed in the accounts


2. Not all companies pay dividends, for example, Microsoft
has never paid a dividend
3. Microsoft believes that its shareholders get a better
return if they forego a cash payment and the money can
be reinvested in the business
DIVIDEND YIELD

Dividend yield = Dividend per share x 100


Market price per share

1. Dividend yield measures the rate of return that an


investor gets by comparing the cost of his share (i.e.
the market price that he pays) with the dividend
receivable
2. It tells investors the percentage of cash return on their
investment, and can be compared with interest rates
and other investment opportunities
DIVIDEND PAYOUT
Dividend payout
= Paid and proposed ordinary dividends x 100
Profits available for ordinary dividends

1. Dividend payout measures the proportion of earnings or


profits that a company pays out to shareholders in the
form of dividends
2. The more the company gives to its shareholders, the
less it has available to reinvest in the business
3. Determining the size of the dividend is a fine
balancing art for most companies
DIVIDEND COVER
Dividend cover
= Profits available for ordinary dividends
Paid and proposed ordinary dividends

1. The information provided by dividend payout may be


expressed differently by dividend cover
2. Dividend cover is quite similar to interest cover, and
measures how many times the dividend could be paid
from the available profits
3. The profits available for ordinary dividends will be the
net profit after tax and less any preference dividend
TOTAL SHAREHOLDER RETURN

Total Shareholder Return

= D1 + (P1 – P0) x 100


P0

Where
D1 – Dividend per share for the year
P1 – Share price at the end of the year
P0 – Share price at the start of the year
Total Shareholder Return
Shows total return made on shares in last
year.

Considers both dividend paid and capital


gain/loss

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