Chapter 15: Ratio Analysis Flashcards
Dividend yield calculation
Dividend yield = Dividend per share / Market Price per share x 100%
What may low dividend yield indicate
A high growth company or overvalued share price
How are yields related to prices?
Inversely related
What does the dividend cover calculate?
- looks at how many times a company could have paid out its dividends based on the profit for the year
- important measure of safety of a dividend
- the higher % the better
Dividend cover calculation
Dividend cover = earnings per share / dividend per share
What does Payout Ratio measure?
The sustainability of a company’s dividend policy. The lower % the better
Payout Ratio Calculation
Payout ratio = dividend per share / earnings per share
Difference between absolute and relative valuation techniques
- Absolute = based on discounting, used to estimate present value of future return
- Relative = estimates value as some measure of earnings power times a multiple
Earnings Per Share Calculation
EPS = Profit available to ordinary shareholders / number of ordinary shares
* Calculates AFTER all other expenses have been made by the company
What is diluted EPS
- worst-case scenario
- assumes that any potentially dilutive securities are converted into ordinary share
- thus the number will be lower as the amount of ordinary shares will be greater
P/E Ratio
- measures how highly investors value a company as a multiple of its earning
- Market Price per share / earnings per share
What does a high P/E ratio relative to its sector average reflect?
- That investors expect the company to achieve above average performance growth
EBIDTDA multiple
- uses ratio earnings before interest, tax, depreciation and amortization –> excludes items that can be inconsistently calculated for P/E
- more comparable measure, comparing the market value of capital from all providers with a measure of profit available to them
- EBITDA = earnings before interest, tax, depreciation + amortization
Main 2 weaknesses of P/E
- based on accounting profits, including estimates
- loss making companies display negative P/E ratios, not based on long-term prospects
3 alternatives to multiples
- Price to Book
- Price to Sales
- Price to cash flow
Gearing
- quantifies the relationship between the proportion of the capital being debt financed and the proportion that is provided by shareholders
- Debt/Capital Employed
Capital Employed = Debt + Equity
Is interest or dividend paid out first?
- interest
What is the ability for a company to pay their liabilities
- Liquidity
Current Ratio Calculation
Current Assets / Current Liabilities
* calculate liquidity
Quick Ratio
Current Assets - Stocks / Company Liabilities
* calculates liquidity
Operational gearing calculation
(Sales Revenue - Variable Cost) / Trading Profits
ROCE
- Return on Capital Employed
- Measure of profitability relative to size
- Profits Before Interest and Tax / Capital Employed x 100
Operating Profit margin
- Looks at how efficient a company is in turning their sales into profit
- Operating profit / Sales
Asset Trunover
Revenue / Total Assets
How may a rights issue affect the accounting ratios?
- raises more capital –> fall in ROE and ROCE
How may a share buy-back affect the accounting ratios?
- increase ROE, ROCE and gearing and EPS
How may a script / bonus issue affect the accounting ratios?
- will dilute earnings per share but should have no impact on ROE or ROCE
