9609 · 10.2.5
Investment ratios — FAQ
Frequently asked questions for 9609 Investment ratios. Direct answers first, then deeper explanation — then practise with marking.
Is a higher dividend yield always better for an investor?
Not necessarily. While a high yield provides good income, it can also be a red flag. It might result from a falling share price (indicating poor performance) or an unsustainable payout policy. Investors seeking capital growth may prefer a company with a lower yield that reinvests more profit for future expansion, which could lead to a higher share price.
What does it mean if a company has a negative or undefined P/E ratio?
A P/E ratio is calculated using 'Earnings per share'. If a company is making a loss, its earnings are negative. In this case, the P/E ratio is not a meaningful metric and is usually stated as 'N/A' (not applicable). Investors would then need to use other metrics to value the company, such as its assets or future sales potential.
Why would shareholders in the same company have different views on its dividend policy?
Shareholders have different investment objectives. An institutional investor like a pension fund or a retiree may prioritise a reliable, high dividend for income. They would favour a high dividend yield with strong dividend cover. In contrast, a younger investor might prefer the company to pay low or no dividends and reinvest the profits to fuel growth, aiming for long-term capital gains through a rising share price.