Earning Per Share

Shareholder Ratios:

Shareholder ratio include the following such as

1 Earning Per Share(EPS)

2 Price/Earning Ratio(P/E)

3 Dividend Yield

4 Dividend Cover

1 Earning Per Share(EPS):

Earning per share also called income per share and it is a shareholder ratio. This ratio is used to determined the income earned per share of stock outstanding. From this ratio we can also determined about the company profitability on a shareholder basis.In this ratio we can compare higher profit company to the lower profitability company.

EPS=Net Profit Ater Interest and Tax - Preference Dividends

Number of ordinary Shares Issued

This formula gives chance to shareholder (or prospective shareholder) to compare one year's earnings with another in terms easily understood.Many investors consider EPS ratio to be the most important ratio. As we can see in the formula that EPS is calculated after deducting preference dividend this is because EPS only measure the income that is available to common stockholders. Preference dividend is set aside because it is for preference stockholder and cannot be given to common stockholder.If the EPS is high than it means that the investor gets higher earning and if the company EPS is low its mean that the investor gets low earning.

Example:

If Company A has net income during the year is $50000.This company is small and have no preference dividend.Company A has 5,000 ordinary shares outstanding during the year. So Company A EPS is calculated like this.

$10=$50,000-0

5,000

Now we can see that Company A EPS for the year is $10. This means that if Company A distributed every dollar of income to its shareholders, each share would receive $10.

2.Price/Earning(P/E):

The Price to earning ratio calculate the market value of an enterprise stock relative to its earning by comparing the market price per share by the earning per share. In other words, the P/E ratio shows what the market is willing to pay for company stock based on its current earnings.Most Investors often use this ratio to evaluate what a stocks fair market value should be by predicting future earning per share.Companies with higher future earning are usually expected to issue higher dividends or have appreciating stockes in the future.

The formula for P/E Ratio is:

P/E=Market Price Per Share

Earning Per Share

The PE ratio helps investors analyze how much they should pay for a stock based on its current earnings. This is why the price to earnings ratio is often called a price multiple or earnings multiple. Investors use this ratio to decide what multiple of earnings a share is worth. In other words, how many times earnings they are willing to pay.A company with high P/E ratio usually indicated positive future performance and investors are willing to pay more for this company's share.On the other hand a company with lower P/E ratio has an indication of poor current and future performance.An important thing to note about this ratio is that,it is useful when comparing like companies in the same industry.

Example:

Company A stock is currently trading at $50 a share and its earnings per share for the year is 5 dollars. Island's P/E ratio would be calculated like this:

P/E Ratio

$10=$50

As you can see, the Company A ratio is 10 times. This means that investors are willing to pay 10 dollars for every dollar of earnings. In other words, this stock is trading at a multiple of ten.

3.Dividend Yield:

Dividend Yield measure the real rate of return by comparing the dividend paid to the market price of a share.This fiancial ratio gives an idea about the company pays out in dividends each year relative to its share price.Dividend Yield is to measure how much cash flow you are getting for each dollar you spent in an equity position.The formula for Dividend yield is

Dividend Yield=Gross Dividend Per Share

Market price per share

Example:

If two companies both pay annual dividends of $1 per share, but company A stock is trading at $20 while Company B stock is trading at $40, then A has a dividend yield of 5% while B is only yielding 2.5%.In that case investor go for company A because of higher dividend yield.

Company A

5%=01

Company B

2.5%=01

4.Dividend Cover:

Dividend Cover ratio is defined as the number of times an organization is capable of paying dividends to shareholders from the profit earned during a financial year.The formula of dividen cover ratio is as follow:

Dividend Cover=Profit after Tax-Dividend Paid on Irredeemable Preference Share

Dividend Paid to ordinary Shareholder

This ratio indicate the capacity of a company to generate dividends out of profit attributable to the shareholders.When we are calculating dividend cover for ordinary shareholder,it is necessary to less any dividend paid on irredeemable preference shares from the net profit earned during the financial period in order to arrive at the earnings attributable to ordinary shareholders.

Example:

Financial Information of company A for the year ended 01 December 2013:

Net Profit 220

Dividend Paid on Ordinary Shares 50

Dividend Paid on redeemable Preference Shares 30

Dividend Paid on irredeemable preference shares 20

Dividend cover in respect of ordinary share may be calculated as follows:

Dividend Cover= 220-20 =4 times

Higher or lower dividend cover may be depend on the level of stability in earning of the organization.If the dividend cover is high it may appeal investor to invest in that company.Higher dividend cover may suggest that the company is retaining a higher portion of its earning to meet its financing requirements and may be result in hiher dividend payouts in future.Dividend cover ratio helps to measure the ability if an organization to pay dividends.Mostly, companies would focus on to sustain a dividend cover of at least 2 times in order to get adequate financing through retained earning while providing a reasonable cash return on shareholder's investment.If the company dividend cover is below 1.5 than the company might not be able to maintain the present level of dividend.Investor use dividend cover ratio to check the level of risk associated with the receipt of dividends on their investment.A low dividend cover helps investor to make decision whether to invest in the company.When there is low dividend cover its mean that this trend will affect the future profitability of the company and hence on the valuation of shares.