Chapter 40- shareholder ratios Flashcards
Shareholder
Ratios included
- dividend per share
- dividend yield
- earnings per share
- price earnings ratio
Concerned with
- allow shareholders to judge how their investments in the shares of the business are performing compared to alternative opportunities
Dividend per share
- how much of the profits are distributed to the shareholders will depend on a range of factors
- once the company has retained some of the profits for future investments some may be distributed
Dividend per share formula
Dividend per share= total dividends paid/ number of shares issued
- doesn’t show how much the shares cost to buy in order to receive this dividend
Dividend yield
- measures the return (dividend per share) on the investment (the cost of buying the share)
Dividend yield formula
Dividend yield= dividend per share/ market price of share x 100
- doesn’t take into consideration other reasons why investors buy shares
What does an increase in the price of the shares mean
The will reduce the dividend yield for new shareholders but may mean a shareholder can sell the shares for a capital gain
What does a fall in the price of shares mean
It will increase the dividend yield but possibly discourage investors from wanting to buy the shares in the first place
Earnings per share
- shows what each share earned in a financial year
Formula for earnings per share
Earnings per share= profit for the year/ number of shares issued
Price earnings ratio
- concerned with the expectations which potential investors hold
- measure of confidence about what the shares will earn
- ratio compares the current market price with the earnings for that share
Difference between dividends and earnings per share
Dividends per share refer to the distributed profits in the form of dividends but earning per share represent the profit after tax
Price earning ratio formula
Price earnings ratio= market price of share/ earnings per share
E.g. 655/ 40= 16.4
Market price is 16.4 times the earnings of the share
