Ratio's Flashcards
Annual return to investors
(P1 - Po) + Dividends in Year / Po
Difference between share price at end and start of year + div received contributes to S/h wealth
Return on Assets
Annual Profits / Avg. NBV of assets
As it has profits involved, it can be manipulated.
This ignore time value of money (less a concern when inflation is low)
ROCE
ROE
Asset Turnover
ROCE = Operating Profit (PBIT) / Cap Employed (S/h funds + LTD + TA-Liabilities) * 100
Shows managers ability to generate profit from resources available
ROE = PAT / Equity x 100
Although not directly comparable its useful to evaluate both to measure the amount of return underlyign the business that pertains so shareholder
Asset Turnover = Revenue / Cap Employed
How much revenue is generated from the capital employed
Relationship between ROCE, Asset Turnover and GPM
ROCE = GPM x Asset Turnover
Lender Ratios
Gearing
Interest cover
Debt Ratio
Gearing = Debt / Debt + Equity
Debt includes: Red Pref shares, Borrowings & Bonds (OD of LT)
Equity includes: IrrRed Pref Shares & Ord shares (+ reserves if valuation is at BV)
Where possible always use M.V. rather than B.V in gearing
M.V = No. of shares x Share Price
B.V = Ord Shares + Reserves
Interest Cover = PBIT / Interest Payable
Debt Ratio - Total LTD /Total Assets
Can be useful for creditors as it measures the vailability of assets in relation to debt
Investor Ratios
EPS
Earnings / No. of Shares
EPS uses historical figures so can be manipulated with accounting policies.
Investor Ratios
P/e ratio
Market Price / EPS
or
Market Capitalisation / Earnings
Investor Ratios
Dividend Yield
DPS / Share Price
or
Total Dividends / Market Capitalisation
Note: Dividend only represents part of the overall return from a share. The rest beign Cap gain, which may be far more significant
Investor Ratios
Dividend Cover
EPS / DPS
or
Earnings / Total Dividends
Gives an indication of the level of profits being retained in the business for reinvestment
Investor Ratios
Earnings Yield
EPS / Share price
or
Total Earnings / Market Capitalisation
Indication of the future earning power of the of entity
Investor Ratios
Dividend Payout ratio
DPS / EPS
or
Total Dividends / Earnings
Explain the relationship between P/e Ratio and Dividend Payout Ratio
Entites with a high P/e ratio will tend to have a low Dividend Payout Ratio as they will require funds to be reinvested for the growth to materalise
Therefore, it will be a more stable entity with a low P/e ratio that will have a higher Dividend payout ratio
The key considertion is to understand what the investor wants as a return (high risk = gapital growth or low risk = steady income)
Earnings Growth
Single Year
Over number is years
Single Year = ((current figure / previous figure) - 1)x 100
Compound - ((4sqroot Current figure / Previous figure) - 1) x 100
