Investor Ratios
Introduction to Investor Ratios
- Investor ratios are used to analyse the dividends and earnings for a company’s shareholders.
- They provide information about the financial return and risk for a company’s investors.
- Key investor ratios include the Dividend Yield Ratio, Dividend Cover Ratio, Earnings per Share (EPS), and Price/Earnings (P/E) Ratio.
Dividend Yield Ratio
- Dividend Yield Ratio shows the ratio of a company’s annual dividend compared to its share price.
- This ratio is calculated as Annual Dividends per Share divided by Market Price of each Share.
- A higher dividend yield can indicate a more profitable investment and is often used to compare the relative attractiveness of different stocks.
Dividend Cover Ratio
- Dividend Cover Ratio reveals the number of times a company could pay dividends to its shareholders out of its profits.
- It’s determined by dividing Earnings per Share (EPS) by the Dividend per Share.
- A higher ratio suggests that a company has more profits to distribute as dividends.
Earnings per Share (EPS)
- EPS measures the amount of a company’s net income that is theoretically available for payment to the holders of its common stock.
- To calculate EPS, you take Net Income minus Dividends on Preferred Stock, divided by Average Outstanding Shares.
- A higher EPS indicates more value, as investors will pay more for a company’s shares if they think the company has higher profits relative to the share price.
Price/Earnings (P/E) Ratio
- The P/E Ratio is a valuation ratio of a company’s current share price compared to its EPS.
- This ratio is calculated as Market Value per Share divided by EPS.
- A high P/E ratio often indicates that the market has high hopes for a company’s future growth, while a low one may indicate the market is taking a more pessimistic view.
Interpreting Investor Ratios
- Higher investor ratios are generally more appealing to investors, as they indicate greater potential returns and lower financial risk.
- However, as with all financial ratios, they should be used in context and analysed over time.
- Comparing the investor ratios of different companies within the same industry can also provide a more comprehensive perspective.
- Despite their usefulness, these ratios should not be solely relied on for investment decisions. Other factors such as business strategy, industry conditions, and wider economic circumstances should also be considered.