Ratios

Market Ratios

Introduction to Market Ratios | Earnings Per Share, Price Earnings Ratio, Dividend Yield
Introduction

Market ratios are used by investors to compare the performance and returns of different companies. They are used in the decision making of investment options. 

 

Earnings Per Share Ratio

The earnings per share calculates the amount of profit after tax earnt per ordinary share of the company. It used mainly to determine the likelihood of a higher dividend payout.

 

 

 

Calculation of Weighted Number of Ordinary Shares

The weighted number of ordinary shares considers the ‘average’ amount of ordinary shares over the financial period.

 

To calculate the weighted number of ordinary shares, identify the change amount of ordinary shares. For example, on the 100th day of the year, the company issued additional shares, increasing the amount of ordinary shares from 10000 to 15000 shares.

 

To calculate the weighted number of ordinary shares, we calculate the sum of the proportion of the year that had 10,000 shares and the proportion of the year that had 15000 shares.

 

For example:

 

 

 

 

Interpretation

Acceptable ratio levels are dependent on each industry; therefore, earnings per share ratios should be compared to industry averages as well as past performance.

 

Generally speaking, the usual interpretations are:

Low (Decreasing or below industry average)

The profits after tax per share has decreased, decreasing financial performance and lowering the chance of a higher dividend payout.

High (Increasing or above industry average)

The profit after tax per share has increased, increasing the financial performance for shareholders and increasing the chance of a higher dividend payout.

 

Price Earnings Ratio

The price earnings ratio measures the value of the market price of a share to its earnings per share. It measures the amount investors are willing to pay for shares.

 

 

Interpretation

Acceptable ratio levels are dependent on each industry; therefore, price earnings ratios should be compared to industry averages as well as past performance.

 

Generally speaking, the usual interpretations are:

Low

Investors are not confident of the future prospects of a company. This presents a lower risk and the chance that the share is undervalued.

High

Investor are highly confident in the future prospects of a company. This will increase the chance of the company underperforming, increasing the risk associated with the investment and the chance it is overvalued.

 

Dividend Yield

The dividend yield measures the amount of dividends paid relative to its market price. It measures the relative rate of return on investment in the shares of the company.

 

Capital Gains/Loss

The dividend yield does not measure the capital gains or losses, that is the gains or losses due to fluctuating market share prices.

 

Interpretations

Acceptable ratio levels are dependent on each industry; therefore, dividend yield ratios should be compared to industry averages as well as past performance.

 

Generally speaking, the usual interpretations are:

Low (Decreasing or below industry average)

The company is paying out low levels of dividends and the rate of return on investment in company is decreasing and is an unfavourable investment.

High (Increasing or above industry average)

The company is paying out high levels of dividends, increasing the rate of return on investment relative to its share price and is a favourable investment.

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