Investment/Shareholders

Interest cover Operating profit / total interest charges It shows how many times the interest payment are covered by the operating profits It is an indication of risk that the future profits maybe insufficient to cover interest payments The risk that the interest payment might turn a small profit into a loss the future dividends might be at risk

Income gearing = Interest expense or charges /operating profit*100

Gearing = Fixed cost capital/Fixed cost capital +equity*100 0r Borrowed capital/Borrowed capital + equity * 100 Gearing ratios show how much borrowing the business has in comparison to the amount of capital invested by the owners bankers if they are approached for more lending, gearing shows the degree of risk being borne by the shareholders or owners compared to the bank. Gearing measures the long term liquidity of the business. A firm with a ratio of less that 50% would be classed as high geared whilst a firm with a gearing ratio of over 50% would be classed as low-geared.   A firm that is highly geared may struggle to meet its loan repayments in times of high demand (when sales fall) o

Earnings per share= Net Profit – Preference Share Dividend Number of issued Ordinary Shares It shows how much profits after tax and preference dividends is attributable to each ordinary share All profits after tax and preference dividends belong to the ordinary shareholders Investors usually regards EPS as a convenient measure of the company success

Price Earnings Ratio= Market Price per share/ Earnings per share It relates the market price of a share to the earnings per share It may be regarded as the number of years earnings that investors are prepared to pay for in the purchase price of a company’s shares. The higher the PER, the greater the confidence of investors in the ability of maintain the EPS. – the higher the better generally. Comparison with other firms helps to identify value placed on the market of the business. It is a measure of investors' confidence in the ability of a company to maintain its earnings

Dividend yield Dividend paid and proposed/ Market Price of share*100 It express the dividend as a percentage of market price per share higher the better. Relates the return on the investment to the share price.

Dividend cover Profit available to pay ordinary dividend /Ordinary dividend paid it shows how easy it will be for a company to make those dividend payments to shareholders – it indicates to investors how safe their dividend payments are. a high level of dividend cover indicates that profits would have to fall a long way before the dividends were threatened. If the result is less than 1, this indicates that the company will have to use retained profits from previous years to pay

Dividend per share Ordinary dividend paid/ Number of issued Ordinary Shares It shows how many times the ordinary dividend is covered by the profit available for dividend A lower cover might indicate that future dividends are at risk if profitability declines. Dividend cover may reflect the directors’ dividend policy A high cover usually indicates a conservative policy

Limitations of Ratio Analysis Ratios deal mainly in numbers – they don't address issues like product quality, customer service, employee morale and so on (though those factors play an important role in financial performance) Ratios largely look at the past, not the future. However, investment analysts will make assumptions about future performance using ratios Ratios are most useful when they are used to compare performance over a long period of time or against comparable businesses and an industry – this information is not always available Financial information can be "massaged" in several ways to make the figures used for ratios more attractive. For example, many businesses delay payments to trade creditors at the end of the financial year to make the cash balance higher than normal and the creditor days figure higher too.