An investor needs to know how to analyse the investor ratios when assessing the financial statements of a company (Also see Getting Ready as An Ambitious Accountant). Investor ratios could be used to determine the health of a business as it can show whether it is a good investment or bad investment.
When a business makes profits, the directors have two options to manage these profits – to reinvest profits or pay dividends. Some investors are searching for development, whereas some investors are searching for a good yield. Some investors are willing to give up short-term profits as they desire to increase the share price to make profits. Below are a few investors ratio that you need to understand:
Earnings Per Share (EPS)
EPS = Net income-Preferred Dividends / Weighted Average Shares Outstanding
This ratio indicates that the profit shown in Profit and Loss that could be paid investors in theory. From EPS, we can determine whether the EPS of the business under consideration is constant, reducing or growing.
Earnings per share are simple to comprehend, and figures are available. However, a research study has revealed that there is a poor connection between shareholder value and earnings per share growth.
Dividend Per Share (DPS)
DPS = Annual Dividends / Weighted Average Shares Outstanding
Annual dividends consist of total dividends paid by an organisation in one year, including interim dividends but excluding special dividends.
Investors used DPS to evaluate various entities to invest in. However, DPS ratio might not show a complete image and position. Some companies might keep their profits for future investments, instead of paying dividends to current investors. By doing so, the company can boost the value of their shares and the general worth of the business.
Dividend Yield = Dividend Per Share / Current Share Price
This ratio shows the percentage return made by an investor regarding the company’s current share price. Investors would have an interest in the dividend yield as they desire returns or good yields from their investment. Dividend yield benefits the investors as it can be used as a comparison with other financial investment chances.
Dividend Cover = Profit After Tax – Preference Dividends / Dividends Paid
Dividend cover measures a company’s ability to pay dividends. It tells us how many times over the profits of a company could pay the dividends. For instance, if a company’s dividend cover is 3, this indicates that the company’s profit was thrice the number of dividends paid to shareholders. Usually, the objective of an organisation is to maintain a dividend cover of 2 to obtain enough funding from retained earnings and to offer a reasonable return to the shareholders.
There are lots of accounting service in Singapore you can seek help from if you need further assistance in understanding financial statement.