Accounting Ratios Flashcards
Earnings Per Share =
Net Profit (After Tax and Preference Share Dividends) / Total Number of Ordinary Shares
Purpose: State the amount of profit (after tax and preference shares) generated for each ordinary share.
P / E Ratio =
Market Price Per Share /
EPS
Purpose: Establishes how well a business can continue to generate earnings; a high PE ratio suggests the shares are in high demand
Return on Equity =
Net Profit (After Taxation and after Preference Dividends) / Capital and Reserves ( shareholder funds)
Purpose: ROE Measures the percentage return a company is achieving on the amount of funds provided by shareholders
Return on Capital Employed =
Trading Profit (before interest and taxation) / Capital Employed (net assets) x 100
Purpose: ROCE is the percentage return achieved on the capital employed in the business
Liquidity Ratio (Acid Test) =
Current Assets - Stock /
current liabilities
Purpose: Shows how easily a company can meet a sudden cash demand
Interest Cover =
Profit (before interest and tax) /
Gross interest payable
Purpose: Shows how well a company can repay debt by stating how many times interest payments are covered by gross profit
Dividend Cover =
EPS / Net Dividend Per Share
Purpose: Indicates how likely a company is to maintain dividend payments
Dividend Yield =
Net Dividend Per Share /
Share Price x 100
Purpose: In the absence of any capital gain, it shows the dividend yield is the return on investment for a stock
Gearing Ratio =
Debt / Assets x 100
Purpose: Indicator of the financial risk associated with a company
Current Ratio (working capital ratio) =
Assets / Debts
Purpose: Helps investors understand more about a company’s ability to cover its short term debt with its current assets
Low = potential insolvency High = Potentially too much cash
Shareholder Funds =
Assets - Liabilities
Payout Ratio
(Inverse of Dividend Cover)
Dividend Per Share / Earnings Per Share
This represents the % of profit that has actually been distributed as dividends to ordinary shareholders.
Low Ratio = company reinvesting profits
High Ratio = may not be sustainable if profits go down
Price Earnings Growth (PEG)
PE Ratio / Earnings Growth
Helps determine a stocks value while taking the company’s earnings growth into account.
Provides a more complete picture than the PE ratio on its own.
Lower Peg, stock may be undervalued and attractive.
Over 1 usually sign over valued.
Net Asset Value (NAV)
Total Net Assets attributed to to ordinary shareholders / number of ordinary shares is issue
A share would not be expected to trade above NAV, as investors would be willing to pay a premium for management expertise, reputation ect.
What are the 4 main limitations to ratio analysis?
1) Often based on historic data
2) Only as good as the source material
3) Changes in organisational accounting periods
4) Shouldn’t be considered in isolation. Should look for trends over time.
