Shareholder Ratios Flashcards
What is a ratio
Quantitive relationship between 2 numbers
Shows how many times one number can be contained within the other
Shareholder ratios assess SP/ this price will be the MP of the share quoted on the RIE
What is the EPS
Earnings per share
= net profit / total ord shares issued
- result is monetary value
- based on recent earnings (OFD)
- shows total amount income earned per ord share after deductions (int, tax, pref div)
- compulsory uk Co to publish quarterly report stating EPS
- comparison tool
Outline assumptions, applications and indicators or EPS
Assumptions
- calculated using various accounting techniques
- earnings from NP / distributable profits could be given to shareholders or retained reserves
Applications
- used to calculate PE
- comparison tool/ compare or contrast shares in plc
- shareholders and analysts can compare yearly earnings
- Indicate Co profitability
- compare competitors in industry or similar investments
- ability to make profit and sustain ord div payments
Indicators
High figure = ✅ preferred and MP will be higher
Shareholders look for positive trends over time/ negative indicate little or no growth in shares
What is the PE ratio
Price Earnings
= current MP of one ord share / annual EPS
- result is multiple
- indicates how many years earnings purchased with 1 ord share at prevailing MP
- indicates how many years to recoup share at MP using current earnings
Forward - based on prospective earnings next 12months
Historical - based on known earnings for past 12months
Outcomes for PE
Low
- shares undervalued
- investors don’t expect earnings growth / believe MP will fall
High
- shares overvalued
- associates with growth
- how much more investors willing to pay than what Co is earning them = market confidence
- MP higher to EPS
- proportion of Co profits costs more as MP changes
Outline limitations for PE
- SP up to date bite EPS not
- assumes static EPS over period = unrealistic
- low PE could mask higher external debts as looks cheaper= look at bigger picture
Outline assumptions and applications for PE
Assumptions
- Ratio fluctuates daily with MP
- MP is the mid market average quoted at close of business day
Applications
- shows share cheapness or expensiveness
- establish industry average and look why results higher or lower for particular Co
- comparison tool used for yearly Co results, competitors or industry as whole
What is the dividend yield
DY = Gross Dividend / current SP @ time of dividend payment x100
- result is a %
-indicates % of earnings directors willing to
Distribute to shareholders form excess income
-measures current years annual rate of return on investment
Outline assumptions and applications for DY
Assumptions
- calculated historic or projected figures
- shown gross but paid net
- MP is ex dividend = now or paid
- dividends paid out of current earnings
- amount depends if directors want div or cap
Applications
- measure rate of return on their investments
- investors/ analysts compare div against current MP per share
- compare level of attractiveness of ord shares that pay divs and other investments between companies
Outline considerations for DY
- used to compare along with other ratios
- well established cos had higher DY
- no DY figure if co doesn’t pay dividends (may not be in financial difficulty as some co reinvest or don’t pay them)
- caution with cos that pay divs above MP as might not meet earnings forecast
- high yields don’t mean shares are cheap, could suggest div may be reduced or missed out in future or possibility reduce profits or losses made
