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.