Accounting - Investor ratios Flashcards
What are the investor ratios?
1) EPS
2) Diluted EPS
3) Earnings Yield
4) Div Yield
5) Div Cover
6) P/E
What is EPS?
EPS = Earnings from ord shareholders / no of ord shares
if needed earnings from ord = Net income - preference div
What does EPS allow investors to do?
Compare company profitability - most useful and popular ratio
What defines EPS and rules for Calculation?
IAS33
What is Diluted EPS?
- Theoretical
- based on potential scenario
- Disclosure required by IAS33
What is purpose of EPS?
warn SH of potential further changed in EPS figure as a result of actions which make take place
What type of accounting should be followed? Prudent or not?
Prudent - we should assume the worst case scenario
What 4 factors lead to share dilution?
1) Convertible loan stock / preference shares
2) Options / Warrants
3) Employee stock options
4) new shares issued
Which should be larger Basic EPS or Diluted?
Basic EPS
if not then use basic anyway
Earnings Yield ratio?
EY = EPS / Market share price
Interpretation of EY?
If industry sector is 10% and yield is 7% - shares are in relatively high demand - maybe because rapid growth is expected and investors are discouting by buying shares
High EY e.g 16% - may mean company not in favour with investors who may anticipate poor yield and weakness
What should EY be compared too?
investors compare EY of index (e.g FTSE 100) to prevailing interest rates (e.g yield on 10 yr gilts) to measure the equity risk premium
What is Div Yield calc?
DY = Div/share / Price/Share
Interpretation of Div Yield
Low DY = may indicate high future growth
High DY = could mean a company is seen as insecure and has a lower s/p and the div is the reward to the investor for the additional risk of holding the share
OR it could mean a company has a strong cash flow and low CAPEX
What Div yield would you expect for a High PE company?
LOW
Dividend Cover ratio?
Div Cover = EPS / Div/share
what is Div cover useful for?
useful guide for directors as to what profits are being paid to shareholders
what does div cover show?
Indicates the stability and growth of dividends
Interpretation of div cover =
less than 1 = suggest uncovered dividend
high div cover = company is retaining most o fits earnings probs with the intention of reinvesting for future growth - common for high growth companies
What is an uncovered div?
company is using retained earnings to pay dividend - could be cause for investor concern
What is P/E ratio?
PE = Price of share / EPS
What does PE ratio show
Valuation of shares
Interpretation of PE
High PE = investors willing to pay premium for high earnings growth or share is over prices (tech companies can have PE of 20)
Low PE = shares are relatively cheap compared to the average for sector or very low PE could mean a security in distress
Shortcomings of PE (x2)
1) If a company doesn’t have earnings or has negative earnings then PE is useless
2) Hard to compare - e.g if one company is growth and the other pays a high div
