In: Accounting
IGF Foods Company is a large, primarily domestic, consumer foods company involved in the manufacture, distribution, and sale of a variety of food products. Industry averages are derived from Troy’s The Almanac of Business and Industrial Financial Ratios and Dun and Bradstreet’s Industry Norms and Key Business Ratios. Following are the 2021 and 2020 comparative income statements and balance sheets for IGF. The market price of IGF’s common stock is $47 during 2021. (The financial data we use are from actual financial statements of a well-known corporation, but the company name used in our illustration is fictitious and the numbers and dates have been modified slightly to disguise the company’s identity.)
Some ratios express income, dividends, and market prices on a per share basis. As such, these ratios appeal primarily to common shareholders, particularly when weighing investment possibilities. These ratios focus less on the fundamental soundness of a company and more on its investment characteristics.
Required:
1. Calculate 2021 earnings per share for IGF.
2. Calculate IGF’s 2021 price-earnings ratio.
3. Calculate IGF’s 2021 dividend payout ratio.
Earnings Per Share
EPS described as it is portion of profit earned during the year is allocated to every outstanding share of company. It is measuring tool used by analysts and traders to measure financial strength of company. It is most important variable and consider for calculating value of share.
Basic Earnings Per Share
When a firm has no remarkable protections that might weaken income per share, it is said to have a basic capital structure. In this unique situation, to weaken intends to lessen profit per share. For example, in case, there are convertible bonds which are changed over, subsequent expansion in like manner offers could diminish (or weaken) income per share. That is, new offers supplanted by changed over bonds may take an interest in future profit.
Diluted Earnings Per Share
Protections, for example, these convertible bonds, while not being basic stock, may turn into basic stock through their activity or transformation. Subsequently, this may weaken (decrease) income per share and is known as expected basic offers. A complex capital structure is said to exist in firm if potential regular offers are remarkable. Other than convertible bonds, other potential basic offers are convertible favoured stock, investment opportunities, and unexpectedly issuable protections. Two EPS Calculations are reported by a firm when it has complex capital structure. Dilutive effect of such securities is ignored by Basic EPS; while such effect for all potential common shares would be considered in diluted EPS.
Requirement of question:
1.
Calculation of EPS for 2021:
EPS = Income available to common shareholders/Weighted average shares outstanding
= $487/$181
= $2.69
Thus, EPS is $2.69.
2.
Calculation of price earnings ratio:
Price Earnings Ratio = Market price per share/Earnings per share
= $47/2.69
= 17.5 times
Thus, price earnings ratio is 17.5 times.
The proportion is a proportion of the market\'s view of the "quality" of an organization\'s income. It shows the value various the capital market is eager to pay for the organization\'s income. As it were, this proportion mirrors the market\'s view of the organization\'s development potential, dependability, and relative danger in that the proportion relates these exhibition measures to the outer judgment of the commercial center concerning the estimation of the firm.
The figuring demonstrates that IGF\'s offer cost speaks to $17.50 for each dollar of income. In such manner, it quantifies the "quality" of income as in it speaks to the market\'s desire for future profit as shown by current income. We ought to know, however, that a proportion may be low, not on the grounds that income desires are low, but since of strangely raised current profit, or, the proportion may be high, not on the grounds that income desires are high, but since the organization\'s present profit are briefly discouraged.
3.
The profit payout proportion communicates the level of income that is appropriated to investors as profits. To figure the proportion for IGF with the data gave, we should appraise profits from examination of the retained earnings account:
Particulars |
Amount |
Opening Balance |
$2,428.00 |
Net Income |
$487.00 |
Less: Closing Balance |
-$2,730.00 |
Dividends |
$185.00 |
Profits evidently were $185,000,000. Profits per share, at that point, would be $185 ÷ 181 = $1.02
Calculation of dividend payout ratio:
Dividend Payout Ratio = Cash Dividend per share/EPS
= $1.02/$2.69
= 37.9%
IGF delivered money profits of $1.02 pennies per share during the latest year, practically 38% of income. The proportion gives a sign of the company\'s reinvestment system. On the off chance that the payout proportion is low, it proposes that the organization holds an enormous part of income for reinvestment purposes, for example, new offices and current activities. Here and there, however, the proportion just reflects administrative technique with respect to the blend of inner versus outer financing. Speculators who, for charge or different reasons, incline toward current pay over market value gratefulness, or the other way around, are especially inspired by this proportion.
EPS for 2021: $2.69
Thus, price earnings ratio is 17.5 times.