9609 · 10.2.5
Investment ratios flashcards
Revision flashcards for Cambridge 9609 Investment ratios (syllabus 10.2.5). Flip, recall, then mark a real past-paper question.
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Dividend per share (DPS)?
Total dividend paid ÷ Number of shares in issue.
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Earnings per share (EPS)?
Profit for the year attributable to ordinary shareholders ÷ Number of shares.
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Dividend yield formula?
DPS ÷ Share price × 100%.
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Dividend cover formula?
EPS ÷ DPS — how many times earnings cover the dividend.
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P/E ratio formula?
Share price ÷ EPS.
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High dividend yield?
High income return — but may signal low share price or unsustainable payout.
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Low dividend cover?
Little profit retained after dividends — risky if earnings fall.
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High P/E?
Market expects future growth; expensive relative to current earnings.
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What is the formula for Dividend Yield and what does it measure?
Formula: (Dividend per share / Market price per share) x 100. It measures the annual return an investor receives from dividends, expressed as a percentage of the share's current price.
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What is the formula for Dividend Cover and what does it indicate?
Formula: Profit for the year / Annual dividends. It indicates how many times the company's annual profit can pay for the total annual dividend payout, showing the sustainability of the dividend.
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What is the formula for the Price/Earnings (P/E) Ratio?
Formula: Market price per share / Earnings per share (EPS). It is a valuation ratio that reflects market expectations about a company's future earnings growth.
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Why might an investor be concerned about a very high dividend yield (e.g., 10%)?
A very high yield might be caused by a falling share price, signalling a lack of market confidence in the company's future. It may also suggest the dividend is unsustainably high and at risk of being cut.
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How do Dividend Cover and Dividend Yield provide a more complete picture when used together?
A high dividend yield might seem attractive, but if the dividend cover is low (e.g., 1.2), it signals that the high payout is risky and may not be sustainable. A healthy dividend cover (e.g., 2.5) validates the sustainability of the dividend yield.
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What type of company typically has a high P/E ratio and a low dividend yield?
A 'growth' company. The high P/E ratio reflects market expectations of strong future earnings growth, and the low dividend yield is because the company reinvests most of its profits to fund that growth, rather than paying them out to shareholders.