Analysis of Financial Statements_11

EARNINGS PER SHARE:

EPS measures the profit available to the equity shareholders per share, that is, the amount that they can get on every share held. It is calculated by dividing the profits available to the shareholders by number of outstanding shares. The profits available to the ordinary shareholders are arrived at as net profits after taxes minus preference dividend. It indicates the value of equity in the market.

EPS= Number of Ordinary Shares Outs ding.

It is the portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.

Calculated as:

An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

The earnings per share ratio is mainly useful for companies with publicly traded shares. Most companies will quote the earnings per share in their financial statements saving you from having to calculate it yourself. By itself, EPS doesn't really tell you a whole lot. But if you compare it to the EPS from a previous quarter or year it indicates the rate of growth a companies earnings are growing (on a per share basis).

DIVIDEND PAYOUT RATIO:

It is the percentage of earnings paid to shareholders in dividends. It is model of cash flow used by investors to determine if a company is generating a sufficient level of cash flow to assure a continued stream of cash to them. It is also a measurement of current net income retained by the company or given out as dividend.

Calculated as:

The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio

If a company’s dividend payout ratio is zero, in other words they do not pay a dividend to its shareholders. This is the case for most high growth firms; their profits are better spent by reinvesting in the firms activities rather than as a cash payout to shareholders. In fact a majority of corporations have elected to pay out less of their earnings as dividends, perhaps because corporate rates of return on reinvested capital are higher these days, but it could also be that dividends are doubly taxed in some jurisdictions.