## 1 Investor Ratios

### 1.1 Earnings per Share (EPS)

Formula:

*Where*

Earnings divided by number of ordinary shares in issue at year-end.

It represents amount of profit belongs to ordinary shareholder per share.

Increase in EPS represents how *efficiently* business has performed to generate profits on capital subscribed in the form of shares.

Illustration:

SOCI (extract) for the year-ended | 30 May 2010 | 30 May 2011 | ||

Workings | $ | Workings | $ | |

Net Profit | 5,000 | 12,000 | ||

Interest expense | (50 + 120) | 170 | (50+100) | 150 |

Profit before tax | 4,830 | 11,850 | ||

Tax expense @ 30% | 1,449 | 3,555 | ||

Profit after tax | 3,381 | 8,295 |

SFP (extract) at the year-ended | 30 May 2010 | 30 May 2011 | ||

$ | $ | $ | $ | |

Equity | ||||

Ordinary Share capital $1 | 3,000 | 3,000 | ||

Share premium | 5,000 | 5,000 | ||

Retained earnings | 4,000 | 4,500 | ||

Other reserves | 1,000 | 1,000 | ||

Equity | 13,000 | 13,500 |

Required:

Calculate earnings per share (EPS) and interpret the results?

Solution:

Formula:

**Earnings per share (2010)**

It suggests that $1.12 of earnings have been attributable to ordinary shareholders on a share.

**Earnings per share (2011)**

It suggests that $2.76 of earnings have been attributable to ordinary shareholders on a share.

**Growth/(Decline) rate**

It suggests that increase in 146% of EPS than previous year.

Irredeemable preference share dividends are deducted from PAT if given.

Increased wealth of ordinary shareholders.

### 1.2 Price Earnings (P/E) Ratio

Formula:

Market price per share divided by EPS.

It represents how many times greater than earnings, investors are willing to pay for purchasing shares of the business.

It suggests *confidence* of the shareholders. Increase in P/E ratio suggests increase in confidence.

Illustration:

Market price of an ordinary share $1 each is $3 in 2010 and $8 in 2011 on average.

Required:

Calculate Price earnings P/E ratio and interpret the results? Use the EPS calculated above.

Solution:

Formula:

**Price earnings ratio (2010)**

It suggests that 2.68 times the amount of earnings an investor is willing to pay for a share

**Price earnings ratio (2011)**

It suggests that 2.89 times the amount of earnings an investor is willing to pay for a share

**Growth/(Decline) rate**

It suggests that payout ratio is increased by 7.84%.

Increased shareholder confidence in an organization or business.

### 1.3 Earnings Yield

Formula:

Earnings per share (EPS) divided by market price per share.

It represents earnings on capital invested in a share. It is the inverse of P/E ratio.

Increase in earnings yield suggests increase in earning capacity of share.

It can also be calculated in total.

Illustration:

Market price of an each ordinary share is $3 in 2010 and $8 in 2011.

Required:

Calculate earnings yield and interpret the results? Use the EPS calculated above.

Solution:

Formula:

**Earnings yield ratio (2010)**

It suggests a share has produced earnings of 37% on its market value.

**Earnings yield ratio (2011)**

It suggests a share has produced earnings of 34.50% on its market value.

**Growth/(Decline) rate**

It suggests that earnings on market share price of a share are decreased by 6.76%.

Reduced return on capital invested in a share

### 1.4 Dividends Yield

Formula:

Dividends per share divided by market price per share.

It represents cash distributed on capital invested in share.

Increase in dividend yield suggests increase in cash generating capacity of share.

It can also be calculated in total.

Illustration:

SOCI (extract) for the year-ended | 30 May 2010
$ |
30 May 2011
$ |

Dividend per share | 0.56 | 2.59 |

Dividend paid | 1690.50 | 7795 |

Retained profits | 1690.50 | 500 |

Market price of an each ordinary share is $3 in 2010 and $8 in 2011.

Required:

Calculate dividend per share and interpret the results?

Solution:

Formula:

**Dividends yield ratio (2010)**

It suggests a share has produced dividends of 18.67% on its market value.

**Dividends yield ratio (2011)**

It suggests a share has produced dividends of 32.38% on its market value.

**Growth/(Decline) rate**

It suggests that dividends on market share price of a share are increased by 73.43%.

Increased dividends on capital invested in a share Increased

### 1.5 Dividend Cover

Formula:

Dividends per share divided by earnings per share.

It represents number of times amounts of dividends can be paid out of earnings.

It represents risk to shareholders. If earnings fall below certain level, there will be no dividend.

Increase in dividend cover suggests increased security to shareholders.

It can also be calculated in total.

Illustration:

SOCI (extract) for the year-ended | 30 May 2010
$ |
30 May 2011
$ |

Dividend per share | 0.56 | 2.59 |

Dividend paid | 1690.50 | 7795 |

Retained profits | 1690.50 | 500 |

Required:

Calculate Dividend cover and interpret the results? Use the EPS calculated above.

Solution:

Formula:

**Dividend cover (2010)**

It suggests that dividends can be paid 2 times out of earnings.

**Dividend cover (2011)**

It suggests that dividends can be paid 1.06 times out of earnings.

**Growth/(Decline) rate**

It suggests that dividends cover is decreased by 47%.

Decreased ability to maintain the level of dividends.

### 1.6 Payout Ratio

Formula:

Dividends per share divided by earnings per share.

It represents percentage of earnings are distributed as dividends.

Appropriateness of payout ratio depends on investor’s preference between dividends and capital growth (increased share price)

It can also be calculated in total.

Illustration:

SOCI (extract) for the year-ended | 30 May 2010
$ |
30 May 2011
$ |

Dividend per share | 0.56 | 2.59 |

Dividend paid | 1690.50 | 7795 |

Retained profits | 1690.50 | 500 |

Required:

Calculate Payout ratio and interpret the results? Use the EPS calculated above.

Solution:

Formula:

**Payout ratio (2010)**

It suggests that 50% of the earnings are paid as dividends or $0.5 is paid as dividends out of $1 earned.

**Payout ratio (2011)**

It suggests that 93% of the earnings are paid as dividends or $0.93 is paid as dividends out of $1 earned.

**Growth/(Decline) rate**

It suggests that payout ratio is increased by 86%.

Higher proportion of dividends was paid out of earnings.