Please enable JavaScript.
Coggle requires JavaScript to display documents.
Earnings per share and other key investor ratios (Earnings per share (A…
Earnings per share and other key investor ratios
Earnings per share
A measure of profit after tax attributable to equity shareholders divided by the number of shares outstanding
A frequently used indicator of a company's profitability and is often used by shareholders for comparing a company's financial health with a company with similar earnings
It is the only such measure governed by an accounting standard, IAS 33
IAS 33 states that basic earnings per share is calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity by the weighted average number of ordinary shares outstanding during the period
Earnings are after taking account of any preference share dividends or settlements if they have been reported as equity
Earning (profit after tax) / no of shares
A company with greater overall earnings than another company is not necessarily more profitable because the company which has less earnings might have a higher EPS.
Price earnings ratio
Measure of earnings growth and is calculated by dividing the market value per share by the EPS
Market value per share / EPS earnings
Market capitalisation (no of shares x current price of share) / earnings
Used a valuation tool for companies by considering the value of the shares as a multiple of their earnings
One of the main drawbacks is that it is calculated using the earnings figure which could be subject to manipulation by management
A low P/E ratio might indicate to investors that its shares are good value for money but it could also mean that earnings are expected to fall
Dividend cover
Measures a company's ability to maintain dividend payments
Shows how many times the dividends could be paid out of profits
A key shareholder investment ratio because most shareholders like to receive regular and stable dividend payments
If dividend cover falls then shareholders might become anxious if profits fall as this may mean their expected dividend payment is under threat
EPS / dividend per ordinary share
Earnings / total dividend
Useful measure of sustained profitability. Dividends are paid out of accumulated profits not yet paid out so if profit is down one year or even if a loss is made, a company may be able to make a dividend payment if last years profit is still available
Dividend yield
Highlights the return on the shares
Annual dividend per ordinary share / market value of share x100
Dividend payout ratio
Measures the proportion of earnings paid out as dividends
Total annual dividend / earnings (profit after tax) x 100
Dividend per share / EPS x100
Key performance indicators
Factors by reference to which the development, performance or position of an entity's business can be measured effectively
UK company law requires company management to report on the measures they use to assess company performance and to judge well their company is doing in their Strategic Report
Companies have for many years reported their own version of company performance which is different from the statutory numbers. When done well these figures can give great insight into how management are running the business and the things they think are really important.When done badly they can mislead users of accounts because the measures are not fully explained, the basis of calculation is changed too often or potentially thee is continual in how the figures are published to make the company look like it is doing better than it is
The use of KPIs are becoming more heavily regulated, particularly for listed companies. They are expected to be calculated consistently and reconciled where appropriate to the statutory figures. There is no need to have such figures audited although the auditors will look at whether the information is consistent with the audited financial statements and what they have seen during their audit