Clever Grades

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Investment Returns: Key Ratios

Meaning and Importance

Why these ratios matter

Investment ratios assess the returns investors receive from their investments in terms of dividends and capital gains, helping shareholders evaluate investment attractiveness and company performance.

Dividend Yield Calculation

Dividend Yield = (Dividend per Share ÷ Market Price per Share) × 100
Indicates the return on investment from dividends alone.

Dividend Yield Interpretation

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Interpretation: Higher yield can attract income-focused investors but may signal risk if the company cuts dividends.

It varies with market price fluctuations.

Dividend Cover Calculation

Dividend Cover = Earnings per Share (EPS) ÷ Dividend per Share
Measures how many times dividends are covered by earnings.

Dividend Cover Safety

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Safe PayoutA dividend cover of 2 or more indicates a safe dividend payout, allowing room for retained earnings.
❌
High RiskCover below 1 suggests dividend payments exceed earnings, risking reduced future dividends.

P/E Ratio Calculation

P/E Ratio = Market Price per Share ÷ Earnings per Share (EPS)
Reflects investor expectations of future earnings growth.

P/E Ratio Expectations

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High P/E suggests high growth prospects or overvaluation.
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Low P/E could imply undervaluation or poor performance.

Improving Investor Return

Investment ratios are essential for shareholders and potential investors to make informed decisions about investing in the company.

1

Profitability

Improving profitability to raise EPS.
2

Dividend Policy

Maintaining sustainable dividend policies with appropriate dividend cover.
3

Growth Prospects

Enhancing company growth prospects to boost share price.
4

Investor Confidence

Effective communication with investors to build confidence.
Meaning and Importance of Return to Investors
Term
Investment Ratios

What do investment ratios assess?

Answer
Explanation

The returns investors receive from dividends and capital gains, helping evaluate investment attractiveness and company performance.

Term
Dividend Yield

How is Dividend Yield calculated?

Answer
Formula

(Dividend per Share ÷ Market Price per Share) × 100

Term
Dividend Yield Meaning

What does a higher Dividend Yield indicate?

Answer
Interpretation

Higher returns from dividends, attracting income-focused investors but may indicate risk if dividends are cut.

Term
Dividend Cover

How is Dividend Cover calculated?

Answer
Formula

Earnings per Share (EPS) ÷ Dividend per Share

Term
Dividend Cover Safety

What does a Dividend Cover of 2 or more indicate?

Answer
Meaning

Dividend payments are safe with room for retained earnings.

Term
Dividend Cover Risk

What does a Dividend Cover below 1 suggest?

Answer
Implication

Dividends exceed earnings, risking future dividend cuts.

Term
Price/Earnings (P/E) Ratio

How is the Price/Earnings (P/E) Ratio calculated?

Answer
Formula

Market Price per Share ÷ Earnings per Share (EPS)

Term
High P/E Ratio

What does a high P/E ratio suggest?

Answer
Interpretation

High growth prospects or possible overvaluation.

Term
Low P/E Ratio

What does a low P/E ratio indicate?

Answer
Meaning

Possible undervaluation or poor company performance.

Term
Improving Investor Returns

Name one method to improve investor returns.

Answer
Method

Improving profitability to increase EPS.

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📈 Return to Investors Quiz

1. What is the formula for Dividend Yield?

Dividend Yield measures dividend return as a percentage of market price.

2. A Dividend Cover below 1 means:

It indicates the company pays more dividends than its earnings.

3. Which ratio indicates investor expectations of future earnings?

The P/E ratio reflects expected growth by comparing price to earnings.

4. A high P/E ratio may indicate:

Investors pay more for perceived high earnings growth potential.

5. Which method can improve returns to investors?

Higher profitability can increase earnings and investor returns.

📊 Results

  • Notes and Quiz
  • Business
  • AS & A Level
  • Accounting & Finance
  • CAIE