Investment Ratios Flashcards
What is the significance of EPS?
Shows the trend in a company’s profitability
EPS is used to make comparisons from year to year.
What does a low dividend yield indicate?
May indicate an overvalued share.
Conversely, a high yield may indicate low growth or that it is underrated by the market.
What does dividend cover show?
How many times the dividend could be paid out of available current earnings. It indicates how likely a company is to maintain dividend payments
A higher figure indicates better financial health. A high figure shows profits are being retained rather than shared.
What is the Price Earnings ratio (P/E) used for?
Used as a comparison between companies in same sector. It shows the relationship between share price and earnings.
Meaningless on its own; better for comparisons between companies or time periods
Measures how likely investors value a company and it’s ability to grow it’s income stream.
P/E ratio indicates the number of years it would take at current EPS to repay share price
What does a high P/E ratio indicate?
Shares are in demand and earnings are expected to grow.
Generally, the higher the P/E ratio, the more investors are willing to pay.
What could a high P/E relative to others in the sector indicate?
- Shares are overpriced
- Perceived ability to grow EPS more rapidly
- Higher quality or more reliable earnings
- Potential takeover target
- Temporary fall in profits
Indicates market expectations about future growth.
What could a high P/E (price earnings ratio) relative to others in the sector indicate?
Shares may be overpriced
Perceived ability to grow it’s EPS more rapidly than competitors
Producing higher quality or more reliable earnings than peers
Being a potential takeover target
Experiencing a temporary fall in profits
What is Price earnings to growth rate (PEG)?
Annual earnings per share growth
It establishes whether a companys P/E ratio is justified
A number less than 1 indicates the shares are potentially attractive
Future growth would need to be realistic to be any use
What is Net Asset Value (NAV)
Number of ordinary shares in issue
It shows the amount available to shareholders if company were to close down, sell it’s assets and distribute the balance
Often used to price collective investment schemes and show the minimum value the shares would be worth on wind up of the company/collective
What is the price to book ratio PB ratio?
Net Assets value per share
It measures the relationship between companys share price and the net book or asset value per share attributable to ordinary shareholders
If ratio shows share price is lower than book price this indicates it’s undervalued or market perceives it will remain a stagnant investment
If share price is higher than book value, this suggests investors view it as a company which has above average growth potential
What is Gordon’s growth model?
(Return required - dividend growth)
It is a simplified model for calculating a share price
Assumes constant divs growth and divs are paid out at end of each period
Helps place a price on the value of an ordinary share
Simplistic and only suitable for mature shareholdings with track records
Can give an idea on current share price against future expected growth
