Wednesday, April 8, 2009

Investing in Colombo Stock Exchange - Key Ratios

Ratio Analysis provides investors method of  systematically analyzing the financial statements of companies. The key to successful analysis is comparison. It is essential that ratios be compared over time within the business to see whether the business is growing or declining and also compare it with similar business and industry norms. We give below the ratios commonly used by the Investors to analyze the risk and return relating to their investments.

Earnings Per Share (EPS)
EPS is the profit attributable to each ordinary share or the earnings the company makes for each ordinary share in existence.

Calculated as:
[EPS = Profit after tax and preference dividends/ Number of ordinary shares in issue]

The growth in EPS is essential, since the growth in EPS means growth in profits per share plus a greater chance of a higher dividend. Investors should compare EPS growth over a period and most importantly should look at future EPS growth.

Dividend Per Share (DPS)
DPS is the proportion of the company’s earnings that the Board of Directors decides to distribute to the ordinary shareholders of the company. DPS is quoted in terms of a percentage of the nominal value of a share and is paid out as cash.

Dividend Yield (D/Y)
Dividend yield is the return as against the market price or the return for the price paid for the stock. Dividend yield is generally lower than interest yield. This is partly due to the fact that the shareholders expected price appreciation (capital gain) to partly satisfy the expected return.

Calculated as:
[D/Y= Dividend/Market Price*100]

Dividend Cover
The Dividend Cover tells you if a company will be able to pay its dividend or how secure your dividend flow would be.

Calculated as:
[Dividend Cover = EPS/DPS]

Investors and companies like the cover to be at least 1 so the dividend payout will not be affected by a short term fall in profits.

Dividend Payout
The proportion or percentage of Dividend paid as against the EPS.

Calculated as:
[Dividend Payout = DPS/EPS*100]

Price Earnings Ratio (PER)
The PER compares the current share price, with the EPS of the company.

Calculated as:
[PER = Market Price/EPS]

The EPS can be a historical EPS or a future projected EPS. PER sometimes referred to as the PE Multiples, means how many times of earnings an investor is willing to pay to purchase a share. In general, a higher PER based on historical earnings or a low PER based on future earnings suggest that investors are expecting higher earnings, indicating the potential. However, due to market inefficiencies even the historical earnings will not be incorporated in the share price. In other words a high earnings yield share will have a low PER compared to other shares in the same sector.

Net Asset Value (NAV)
The shareholders funds as the name implies belongs to the ordinary shareholders. Therefore the NAV is basically the shareholders funds for one ordinary share.

Return On Equity (ROE)
This ratio helps investors to assess how much return the company is making for the total shareholders funds. Broadly speaking, the higher the return on equity, the more successful a company is.

Calculated as:
[ROE = Profit Attributable to Ordinary Shareholders/Shareholders Funds*100]

source - bartleet mallorystockbrokers