Investors Ratios Flashcards
What is the formula for Dividend Cover?
Profit after interest and tax/ Ordinary share dividends paid
What is the formula for Earnings per share?
Profit after tax in pence/Number of issued ordinary shares
What is the formula for Interest Cover?
Profit before interest and tax/Interest Payable
What is the formula for Dividend Yield?
(Dividend per share/Market price per share) x 100
What is the formula for Price Earnings?
Current Market Price/ Earnings per share
What is the formula for Capital Gearing?
(Non-Current Liabilities/ Capital Employed) x 100
What is the formula for Capital Employed?
Closing Capital(or Total Equity) + Non - Current Liabilities
What does the gearing ratio represent?
Capital provided by others e.g. bank loans, debentures, as a proportion of capital employed
What is the main characteristic of the gearing ratio?
It is borrowing with a fixed interest rate
What are the downsides of high gearing?
- High cost of borrowing
- Increased expenses ——> Less Profit
- Dividends are reduced/suspended
- Loss of shareholder & difficulty attracting new shareholders
What are the upsides to high gearing?
- If used effectively it can mean revenue/profit increases in the long term
- Increased Dividends for shareholders
What is an external factor that affects gearing?
Base rate of interest
What does interest cover show?
The amount of times interest can be paid out of profit before interest & tax
How is interest cover linked to capital gearing?
If capital gearing is high, but interest cover is also high then the company is covering their debts well
What does it mean if interest cover is high?
There is high dividends available for shareholders
What does Dividend Yield show?
The return received by an investor on their shares
What are the upsides of a high dividend yield?
- High dividend received by shareholders
- Shareholders maximise income
- Compensation for their risk
- Attractive shares for future investors
What are the downsides to a high dividend yield?
They could be giving out a high dividend to attract investors, then cut it down afterwards
What are the limitations of a high dividend yield?
- Ignores current year’s profits
- Could be using retained profits to pay high dividends, which may not be sustainable
What does dividend cover show?
How many times over dividends could be paid out of profits after interest and tax
What are the upsides of a high dividend cover?
Shareholders are confident that dividends could be maintained at the same level even if profits decline
How does dividend cover link to dividend yield?
When both are high it means there is a high quality of dividend yield
What are the downsides of high dividend cover?
- Could mean directors are prudent, they could have paid more dividends out
- It could mean the company has insufficient funds to pay for dividends
What does Earnings per share show?
- How much profit after tax is earned per share, higher the better
- Shows how efficient a company is in using its capital to generate profits
