Calculation of Shareholder Ratios
Calculation of Shareholder Ratios
Definition of Shareholder Ratios
- Shareholder ratios are key indicators used to gauge the profitability, efficiency and financial stability from the perspective of a shareholder.
- They provide insight into how well a company is managing its resources and generating returns for its shareholders.
Types of Shareholder Ratios
- Earnings per share (EPS): This measures the profit for each ordinary share.
- Price/Earnings (P/E) ratio: This shows the relationship between the market price of a share and the earnings per share.
- Dividend yield: This indicates the return a company pays out to its shareholders in the form of dividends.
- Dividend cover: This shows the number of times a company could pay its current level of dividends out of its profits.
Calculation of Shareholder Ratios
Earnings Per Share
- EPS = (Profit after tax − Preference dividends) ÷ Average number of issued ordinary shares
- A higher EPS indicates better profitability per share.
Price/Earnings Ratio
- P/E ratio = Market price per share ÷ Earnings per share
- A lower P/E ratio could mean that the shares are undervalued.
Dividend Yield
- Dividend yield = (Dividends per share ÷ Market price per share) × 100
- A higher yield means more return in dividends relative to the share price.
Dividend Cover
- Dividend cover = Profit after tax ÷ Total dividends
- A higher cover means the company has stronger capacity to pay dividends from profits.
Importance of Shareholder Ratios
- Shareholder ratios are vital in investment decisions as they provide investors with a snapshot of company’s value and profitability.
- Enables comparison between companies within the same industry, assisting investors in identifying better investment opportunities.
Limitations of Shareholder Ratios
- They are based on past performance and may not be an indicator of future performance.
- Ratios vary significantly between industries, so it’s important to only compare companies within the same sector.
- The ratios do not consider the company’s asset value, which could be significant in case the company sells off its assets.