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Thursday, June 3, 2010

Shareholders’ Investment Ratios
  • Earning per share (EPS)

It is possible to calculate the return on each ordinary share in the year. This is the earnings per share (EPS). Earnings are profits after tax, preference dividends and “extraordinary items” (separately disclosed, large and very unusual items), which can either be paid out as a dividend to ordinary shareholders or retained in the business.

EPS = Profits after tax and preference dividend / Number of ordinary shares

  • Dividend per share (DPS)

The dividend per share in pence is self-explanatory, and clearly an item of some interest to shareholders.

DPS = Total ordinary dividends / Number of ordinary shares

  • Dividend Cover

Dividend cover is calculated as follows.

Dividend cover = Earnings per share / Dividend per share

It is shows proportion of profit on ordinary activities for the year that is available for distribution to shareholders has been paid (or proposed) and what proportion will be retained in the business to finance future growth. A dividend cover of 2 times would indicate that the company had paid 50% of its distributable profits as dividends, and retained 50% in the business to help to finance future operations. Retained profits are an important source of funds for most companies, and so the dividend cover can in some cases be quite high.

  • Profit earnings ratio (P/E ratio)

The P/E ratio is the ratio of a company’s current share price to the earnings per share.

Price earning ratio = Current share price / EPS

A high P/E ratio indicates strong shareholder confidence in the company and its future, profit growth, and a lower P/E ratio indicates lower confidence.

The P/E ratio of one company can be compared with the P/E ratios of:

  1. Other companies in the same business sector
  2. Other companies generally


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