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Investor ratios and shares
Important Ratios
After evaluating the Income Statement (profitability), Balance Sheet (financial position) and the Cash Flow Statement (cash flow) based on the numbers, you may support the analysis of the numbers by using ratios. Only the most common ratios used by investors will be discussed.
| Earnings per share (EPS) = | Profit attributable to ordinary shareholders |
| Total Number of ordinary shares in issue |
The EPS shows the company's profits (earnings) allocated to each share in issue. The higher the company's EPS, the better. This ratio allows you to determine at a glimpse whether the company is doing better or worse compared to the past year/s or versus its competitors.
A high and growing EPS is an indication that the company is growing and doing well for its shareholders, a low and decreasing EPS is a sign that the company might be struggling.
| Dividend Yield (DY) = | Dividend paid per share (D) |
| Current Market Price per share (P) |
Remember that there are two ways to benefit from investing in shares: capital growth and dividend income. The dividend yield refers to the % of the purchase price that will return to the shareholder in the form of a dividend.
| P/E Ratio = | Current Market Price per share |
| Headline Earnings per Share |
Generally, the lower a company's PE ratio, the better.
A PE ratio of 15 for example means that it will take 15 years for the company to recover the money originally spent to buy the share. In reality this is not usually the case, as companies can earn the same profits in a much shorter time (profits change year to year).
You can compare PE ratios of different companies to see how they rate against one another. You should compare companies in the same industry, as different industries may have different PE ratios.
The P/E ratio should be looked at in conjunction with other positive factors, such as a strong industry, growth prospects, etc. If the other factors are positive and a company has a low PE, you can take it as a good sign. If the industry is weak, or company has no growth prospects, a high PE might serve as a warning.
Example
| Company | Close 25/10/07 I | PE | EPS | DY | % move in share price over 1 yr |
| BHP Billiton | 24050 | 14.49 | 1652.40 | 1.41 | 64.0 |
| MTN | 12000 | 19.26 | 298.59 | 0.93 | 73.0 |
| Mittal | 13890 | 10.89 | 699.27 | 2.72 | 58.8 |
| Naspers | 19343 | 22.07 | 675.89 | 0.68 | 40.6 |
| Murray and Roberts | 10349 | 31.52 | 238.94 | 1.33 | 198.0 |
At a glance you can see:
- Ratios can vary a lot between different companies. Look at Murray and Roberts PE ratio compared to that of Mittal; and the EPS of BHP Billiton compared to that of MTN; and the difference in dividend yields for the different companies.
- Murray and Roberts is the most expensive company when looking at PE ratio, but the share price is growing the quickest. This share price therefore offers the greatest capital return. This is not surprising, considering the amount of construction work taking place before the 2010 Soccer world cup!
- MTN and Naspers are paying low dividends in relation to the share price so if you are looking for shares that can provide you with an income, these may not be the ones for you. Mittal would be a better option.
- BHP Billiton is the most expensive share when looking at price alone, but it has an average PE, DY and good capital growth over 1 year.
The daily newspapers calculate PE, DY and % move in share price for the past year so you will not need to calculate these yourself, instead they are available in the press for your review.
Dividend cover
Dividend cover calculates how many times the dividend is covered by earnings as follows:
| Dividend cover = | Earnings per share |
| Dividend per share |
The lower the dividend cover, the higher the percentage of total earnings paid out as dividends to shareholders.
For example, if the dividend per share is R1 and the earnings per share is R4 the dividend cover is 4 times. This means the company is paying only 25% (quarter) of what it earned out in dividends. A dividend cover measures how conservative or generous the board of directors is when it comes to dividend declaration.
Dividend cover varies from company to company depending on each company's dividend policy, cash flow and performance. It is acceptable for a company to retain a high % of earnings to facilitate financial growth
| Dividend Yield (DY) = | Dividend paid per share (D) |
| Current Market Price per share (P) |
Remember that there are two ways to benefit from investing in shares: capital growth and dividend income. The dividend yield refers to the % of the purchase price that will return to the shareholder in the form of a dividend.
Market Capitalisation
| Market Capitalisation = | the Current Share Price x the number of shares issued |
The calculation is usually done if an investor is interested in knowing how the company is positioned in the sector as well as how strong it is in relation to other companies in the same sector. Assuming you want to establish a company's total value (100% shares), you'll use this figure.
Categories of market capitalisation include large, mid and small caps.
As a general rule, companies with a large market capitalisation are safer (less risky) than smaller companies with a smaller market capitalisation. Small companies are more exposed to competition, and tend to be illiquid (when their shares are up for sale there may be no buyers).
Note: Market capitalisation is not always a good indicator. You have to look at this indicator in conjunction with other fundamental indicators.