14.2 Investment valuation ratios

Question 1

What ratios provide useful data for ordinary shareholders?

Answer 1

Dividends
- payout ratio
- cover ratio
- yield ratio
Earnings
- earnings per share (EPS)
- price/earnings (P/E)

Question 2

What is the dividend payout ratio?

Answer 2

A measure of earnings paid as dividends as a percentage of profits (after tax and preference dividends).

DPR = [annual dividend/ profits (after tax and pref. dividend)] x 100

Question 3

What is the dividend yield ratio?

Answer 3

Indication of dividends paid as a percentage of share price.

Dividend yield = [dividend per share] / [market price per share] x 100

Question 4

What is the dividend cover ratio?

Answer 4

The invest of dividend payout ratio - i.e. profits after tax divided by dividends paid.

Dividend cover = [profits after tax and preference dividends] / dividends for the year