Investor Ratios
Why Investor Ratios?
The profitability, liquidity, efficiency, and gearing ratios from financial analysis assess business performance. Investor ratios specifically help shareholders and potential investors assess the return on their investment and the value of the shares.
The Five Investor Ratios
1. Earnings Per Share (EPS)
$$\text{EPS} = \frac{\text{Profit after tax}}{\text{Number of ordinary shares issued}}$$
- Measures the profit attributable to each share
- A rising EPS indicates growing profitability per share
- Used as the basis for the P/E ratio
2. Dividend Per Share (DPS)
$$\text{DPS} = \frac{\text{Total dividends paid}}{\text{Number of ordinary shares issued}}$$
- Shows the actual cash return paid to each share in the year
- Not always the same as dividend yield (which uses market price)
3. Dividend Yield
$$\text{Dividend yield} = \frac{\text{Dividend per share}}{\text{Market price per share}} \times 100$$
- Expresses the dividend as a percentage of the current market price
- Allows comparison with returns from other investments (e.g. savings accounts)
- A high yield may indicate a high payout or a falling share price
4. Dividend Cover
$$\text{Dividend cover} = \frac{\text{Earnings per share}}{\text{Dividend per share}}$$
- Shows how many times the dividend is covered by earnings
- A cover of 2× means the company earned twice what it paid out as dividends
- Higher cover = more profit retained for reinvestment; lower cover = higher payout but less retained
- Cover below 1× means dividends are being paid from reserves (unsustainable)
5. Price/Earnings Ratio (P/E Ratio)
$$\text{P/E ratio} = \frac{\text{Market price per share}}{\text{Earnings per share}}$$
- Shows how many years' worth of current earnings the market is paying for the share
- A high P/E suggests the market expects strong future earnings growth
- Used to compare valuation across companies in the same industry
6. Interest Cover
$$\text{Interest cover} = \frac{\text{Profit from operations}}{\text{Interest payable}}$$
- Measures how many times the company can pay its interest charge from operating profit
- Cover of 3× or above is generally considered safe
- Low interest cover signals financial risk — interest may not be affordable if profits fall
Interpreting Investor Ratios
- No ratio should be used in isolation — always compare to prior years and industry benchmarks
- A high dividend yield with low dividend cover may signal an unsustainable payout
- A high P/E ratio with falling EPS warrants caution — the market may be overvaluing the company
- Interest cover below 1.5× indicates the company may struggle to service its debt