Most common Equity ratios

Question 1

Earnings Per Share (EPS)

Answer 1

Provides the amount of profit (after tax and preference share dividends) generated for each ordinary share

EPS = Net profit
———————-
Total number of ordinary shares issued

Question 2

Price Earnings Ratio (P/E Ratio)

Answer 2

Establishes how well a business can continue to generate earnings, a high P/E suggests shares are in high demand

P/E ratio = Price of shares
————————-
Earnings pre share

Question 3

Price Earnings to Growth Ratio (PEG Ratio)

Answer 3

Measures whether the P/E ratio is good value. A number below 1 indicates share price may represent value, above 1 indicates it might be overpriced

PEG ratio =

   P/E ratio  ------------------------- Annual Earnings per share growth

Question 4

Dividend yield %

Answer 4

In absence of any capital gains, it shows the dividend yield is the return on investment for a stock, ie how much ‘bang for your buck’ you are getting from dividends

Dividend yield =

Net dividend per share ———————————– X 100
share price

Question 5

Dividend cover

Answer 5

Indicates how likely a company is to maintain dividend payments

Dividend cover =

              EPS
     --------------------   Net dividend per share

Question 6

Payout ratio

Answer 6

Measures how much of a companys profit has been paid as dividends. Calculation is the other way around to dividend cover

Payout ratio =

Net dividend per share
————————————-
EPS