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.