EARNINGS PER SHARE (EPS)
This is a popular profitability statistic used by financial analysts. 'Earnings available for distribution' is bottom-line net profit attributable to shareholders after all other costs have been deducted. Many remuneration packages are linked to EPS growth.
EPS = Earnings available for distribution / Number of shares in issue
PRICE/EARNINGS (P/E) RATIO
The P/E ratio applies to publicly listed companies and is a key measure of value for investors. A P/E ratio of 10 means that investors are willing to pay 10 times previous year's earnings for each share. Generally, the higher the P/E ratio, the higher the growth prospects perceived by investors.
P/E ratio = Share price / EPS
DIVIDEND YIELD
This measures cash paid to shareholders as dividends. This should be compared to capital growth, to measure the overall return to shareholders.
Dividend yield = Dividend per share / Price per share
Mature businesses tend to have higher dividend yields than young businesses, as the latter reinvest most of their earnings. Investors looking for high-income investments choose high-dividend yield companies.
DIVIDEND COVER
This follows a similar principle to 'interest cover'. It measures how many times a business can pay its dividends from its earnings. It is used as a measure of dividend risk.
Dividend cover = EPS / Dividend per share
It also measure the proportion of profits retained in a business versus paid out as dividends. For example, a dividend cover 3 times shows that a business has paid one third of its profits to shareholders and retained two-thirds. Retained earnings are an important source of finance and therefore dividend cover is often high.
Use investor ratios to see if business goals are aligned with investor goals.
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