Financial Analysis

Investor Ratios

Who uses investor ratios

Investor ratios help:

• Existing shareholders decide whether to keep or sell their shares
• Potential investors decide whether to buy shares or invest elsewhere

Shareholders invest for: long-term capital growth (share price rises); short-term income (dividends); voting rights at AGM.

Summary of formulas

Preliminary calculations

Before applying the formulas, two figures are often needed:

1. Number of shares = Share capital ÷ nominal value per share

   • E.g. £2 500 000 of £0.50 shares = 5 000 000 shares

2. Dividend per share (DPS) = Total dividends paid ÷ number of shares

   • E.g. £750 000 ÷ 5 000 000 = £0.15 or 15p per share

Ratio interpretations

• Dividend yield — direct annual income return based on current market price; fluctuates with market price
• EPS — profit capacity to pay dividends; companies aim to keep EPS stable or rising
• Dividend cover — how many times dividends could be paid from available profit; higher = safer dividend
• PE ratio — how many years of current earnings investors are paying for at the market price:
  • High PE: expensive shares; may reflect expected future growth
  • Low PE: cheaper shares; may reflect low growth expectations
• Interest cover — how many times the interest on debt can be covered by operating profit; higher = safer position

Worked example (ABC plc vs XYZ plc)

ABC has better dividend yield and interest cover; XYZ has better EPS, dividend cover and PE ratio. Choice depends on investor's priority: income (ABC) vs capital growth (XYZ).