Fundamental Analysis: Financial Ratios

Submitted by Sharemarket News on 13 May, 2011 - 18:13

Learn about ratios and per share data.

Analyst reports are created by professionals who interpret annual reports. Analysts use annual report data to create forecast and calculate financial ratios. Financial ratios are used to compare a company's performance for a specific period to its previous results, competitor results and market averages.

Although there are disadvantages to using ratio analysis (imperfect data or too much data), reviewing analyst reports will add objectivity to your interpretation. An objective approach avoids knee jerk reactions and takes out the emotion from the equation.

Per Share Data

Analyst reports relate a company's performance to the price of its shares. Calculating per share data allows the investor to compare a company's financial health to the price of its share. Two ratios commonly used by investors are dividend yield and dividend per share.

Dividend Per Share

Dividend per share is the the total number of dividends paid out to shareholders over a period divided by the number of outstanding shares, expressed as cents per share. The formula is: DPS = Total dividends paid divided by number of issued shares (or DPS = D – SD/S).

Let's say company Miners R Us (MRU) paid a sum of $250,000 in dividends over the last year. A one-time dividend of $50,000 was also paid. MRU has 2.5 million shares outstanding so its DPS would be ($250,000-$50,000)/2,500,000 = $0.08 cent per share.

A wise analyst would check if the dividends paid out is from the current year or from retained earnings from previous years.

Dividend Yield

Dividend is a ratio that measures how much cash flow is received for each dollar invested in an equity position. The value is expressed as a percentage. The formula is dividend yield = DPS/Share Price.

For example, Miners R Us (MRU) and Seven Dwarfs Mining (SDM) both pay annual dividends of $1 per share. MRU stock trades at $15 while SDM stock trades at $30. Based on the formula, dividend yield for MRU is 6.7 percent, while it is only 3.3 percent for SDM.

An investor looking to profit would likely pick MRU over SDM because of the higher dividend yield. However, note that high dividend yields reflect past payouts, and can be affected by share price movements. To get an accurate picture, it's necessary to check forecasts and how much the dividend had been franked.