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Shareholder ratios minimum of three formulas?

Shareholder ratios minimum of three formulas?

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Expert Solution

Main purpose of the shareholder ratios is use to analysis/ measure the returns that shareholders gains from their investment. There are many such but few ratios that can be used by shareholders in order to assess the worth of a particular company and their shares are:

1. Earning per Share (EPS) -

= Profit after Tax/ nos of ordinary share

  • Ratios measures total earning available to shareholders that the company can may pay as potential dividends.
  • Eg.

· if a company has profit after tax of $18m and it has issued 40 million ordinary shares, then its E.P.S. would be:

· = $18m / 40m = $0.45

· This means that every ordinary share could pay a dividend of $0.45 IF all the profit after tax is distributed as dividends. However, it is most unlikely as company would require profit for reinvestment in business

2. Price Earning Ration (PE ratio) -

= Market Price per Share/ Earning Per Share

  • This measures the market price of the share as a proportion of the earnings per share calculated above
  • or in other word one can say how much to invest in one share in order to earn return of $1.00
  • Higher the PE; better the expectation of company's future profitability
  • Eg.

· Lets continue above example where MP is $2.00; PE ratio would be:

· = $2 / $0.45 = 4.44

3. Dividend Per Share (DPS) -

= Total Dividend paid/ Total Nos of share

  • it shows dividend actually paid per share by company to its shareholders.
  • Eg.

· Lets’ say in above example Dividend paid is 20% of PAT i.e $3.6 m (20% x 18m; DPS would be:

· = $3.6 m/ 40m = $ 0.09

· This means ever shareholder is paid dividend of $ 0.09 while remaining of $ 18m is reinvested in business.

4. Dividend Yield (%)-

= (Dividend Per Share / Market Price per Share) x 100

  • it express dividend paid in proportion to shares market price i.e. absolute returns
  • Eg.

· Lets’ continue above example; Dividend yield would be:

· =( $0.09/ $ 2.00) x 100 = 4.5 %

· But of course this is not very high return and above need to compare with other investment to see if investment is giving competitive return.

5. Dividend Cover (times)-

= Profit After Tax / Total Dividend paid

  • The ratio shows how many more times the dividends could have been paid out of the profit after tax.
  • Eg.

· Lets’ continue above example; Dividend yield would be:

· = $ 18 m/ $3.6m = 5 times

· Company has not paid significant portion of its earning and retained the same for reinvestment in business


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