Introduction
The fast-paced business environment in the modern-day and age poses an increasingly challenging dynamic for investors. This is primarily because of the fact that there are numerous different options that investors have to choose from, and therefore, they ideally look for options that are likely best suited to their investment profile and taste.
In this regard, it is also important to note the fact that investors today are supposed to ensure that they are able to carry out a stringent study of the organization they plan to invest in so that they are able to knowingly invest from the options they have available.
In this regard, investor ratios tend to be highly resourceful for investors, because they are able to impart some extremely valuable information about the organization.
Definition
Investor Ratios can simply be defined as ratios that the investors use in order to evaluate the ability of the company to maintain profitability and continue generating positive returns against their investment.
Investor ratios are considered to be extremely important when making investment decisions because of the fact that they provide some useful and valuable insights about the company in context to other companies, or other existing investment options.
Investor Ratios can be categorized into numerous different categories, depending on the different existing ratios that exist.
Types of Investor Ratios
There are a number of investor ratios, which prove to be critical for investors. They are mentioned below:
Earnings per Share
Earnings per Share is a numeric representation of the earnings that the particular organization earned over the course of time. It is calculated using the following formula:
Earnings per Share = Total Earnings / Outstanding Shares of the company
This particular ratio shows the company’s ability to generate profit. From an investor perspective, the higher the EPS (Earning per Share), the better the investment prospect.
This ratio is also compared over time. If over the course of time, the company reports higher and higher earnings per share, it means that the future prospects of the company look widely positive.
Price to Earnings Ratio
P/E Ratio (Price to Earnings Ratio) is a comparison of the amount that the company earns, with the price of the particular share. This relationship between the share price, and the earnings that are respectively earned out of that investment are indicative of the value of the company in the existing capital market.
This ratio also tends to be important for the investors because it gives them an idea about what to expect on the fronts of the risk-reward scheme. P/E Ratio of the company is calculated using the following formula:
P/E Ratio = Share Price / Earnings per share
Hence, it can be seen that this particular ratio incorporates both, the share price, and the number of shares that are issued by the organization.
Dividend Cover
Dividend Cover can be defined as the financial ratio that takes into account the number of times the company can pay dividends to the shareholders. This is done by comparing the net income of the company with the dividend that is paid.
Hence, it encapsulates the number of times the company can pay dividends from the net income that is generated by the company. Therefore, it is calculated using the following formula:
Dividend Cover = (Net Income) / (Dividends declared or Paid)
Alternatively, dividend cover can also be calculated by comparing the EPS and the declared dividend by the company for the ordinary shareholders. In this particular scenario, the formula for dividend cover is as follows:
Dividend Cover = EPS / (Dividend Declared per ordinary share)
Dividend Yield
Dividend Yield can be described as the financial ratio that provides a direct measure that is generated from a return of investments that are made in the shares of the company. This is calculated by comparing the dividend per market share to the existing market price per share.
This particular metric is also frequently used by investors because it helps them compare and subsequently assess the relative benefits of existing investment opportunities in the market. In the same manner, it can also be seen that this helps to calculate the return on investment, which investors can expect to generate.
Therefore, this is calculated using the following formula:
Dividend Yield = (Dividend per Share) / (Share Price)
The dividend yield is basically a metric that shows the return that can be generated as a result of the investment in the particular company. Hence, this tends to be one of the main factors which investors incorporate, so that they can choose stocks that have a higher dividend yield in comparison.
