Section: 2 Financial Ratio Analysis

Sub Section: 2 Stock Market Ratios

These ratios give an indication of how investors perceive the company; it’s past performance, future prospects, etc. The performance of the company's shares in the stock market is crucial from shareholders’ point of view and management as well. In some organizations top management bonus are linked to the share price in the stock market. 

 

Earnings Per Share (EPS)

Investors would like to know how much profit is generated by each share they hold and EPS provides this valuable information. The market fetches higher prices for high profit growth companies. Small capitalization companies with high profits will naturally show attractive EPS.

 

 

Price Earnings Ratio

            Measures the amount investors are willing to pay for each Riyal of the firms’ earnings.

            This ratio reflects the investors’ expectations concerning the firms’ future prospects. 

 

 

A PE of 10 means that the share is trading at 10 times its earnings. Higher PE ratio shows investor optimism towards the company and vice versa. 

 

Earnings Yield

Measures the earnings capability of an ordinary share relative to its market price. i.e. the return generated by each ordinary share on its’ current market value. Profitable companies carry attractive earnings yield.   

 

 

Dividend Per Share

The amount of cash dividend calculated on a per share basis. Investors have two modes of return from investments namely dividend and capital gains. Dividend is regular income while capital gains are appreciation of share price over time. Capital gains are materialized when disposing the shares. However, investors differ in opting for dividend or capital gains. Some investors prefer dividend over capital gains and some vouch for capital gains. Investors who invest for regular income are keen to look at the dividend per share.

 

 

A pension fund invests primarily for pensioners’ income and generally invests in high dividend bearing stocks. Whereas corporate investments are intended for capital growth in a general sense. 

 

 

Dividend Yield

Dividend return per share relative to its market value. This is calculated in the same manner as earnings yield.

 

 

Dividend Pay-out Ratio

This ratio indicates what percentage is paid out as cash dividends out of net earnings. Generally companies pursue a dividend policy that determines the pay-out of dividends. A high dividend pay out is a positive signal to some shareholders, on the other hand it could also mean that the company does not have profitable investment avenues to make use of shareholders’ funds.

 

 

Book Value Per Share

This ratio represents the equity of the firm on a per share basis and is sometimes used as a benchmark for comparison with the market price per share. The focus is on how close market value is to book value. If the stock price is very close to book value or below book value, then the stock is a “buy,” as downside risk is viewed as negligible. Thus book value is viewed as a conservative estimate of the firm’s value. 

 

 

Price to Book Value

Relates the market price of a share to its book value. This ratio compares the book value of the share with the market value to show the strength of the share i.e. what is the asset backing, at what multiple of the book value the share is trading in the market. 

 

 

Price to book value of more than one means that the investors are willing to pay higher than their accounting book value. Well performing company shares generally trade at multiples of its book value.

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