Market (investors) Ratios
Perhaps the more accurate be to say ratios for potential investors. People, businesses or organizations with
surplus funds are always looking for lucrative places where they can invest their surplus funds and generate handsome return. One way is to invest the surplus funds in banks (saving accounts) and earn interest, another way is to invest such funds in companies (business) and earn dividends thus such persons are potential investors for any business.
Making investment in companies (businesses) bears some risks e.g. the investment made could be lost if company goes in liquidation or company might not be able to earn sufficient profits so that investors could have sufficient return in the form of dividends.
Therefore before making the decision of investment, potential investor gathers information about the company. Some of such information is gathered using ratio analysis and particular ratios used for this purpose are called “Market or more appropriately Potential Investors Ratios”.
Besides potential investors these ratios are also meaningful for existing investors for making decision whether to keep investment in the business or move to some other business.
Types of Market (investors) Ratios
For making decision whether to make investment in a particular company or not, a potential investor can use following ratios.
- Earnings per Share (Ratio)
- Dividend per Share (Ratio)
Following pages will explain the listed above ratios using the written below method:
First question comes in mind is HOW TO CALCULATE THE PARTICULAR RATIO? I will write down the most common formula used for calculating a ratio along with alternative, if any.
With example I will calculate the ratio using the formula given above. PLEASE NOTE THAT, in examples I will use data from HYPOTHETICAL FINANCIAL STATEMENTS (as given here)so that you can calculate ratios from real financial statements in you practical life.
In which unit the ratio is measured i.e. in currency unit (dollars), percentages, days or whatever.
After calculating the ratio, the next logical question that comes in mind is WHAT DOES THIS RATIO MEAN? So I will teach
- How to interpret the ratio; and
What particular user needs this ratio addresses. (You must have an understanding of users’ needs of financial statements; please refer the topic 1- financial statement users for details).
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