Price/Earnings (P/E) Ratio
Investors apply the P/E ratio to determine a firm’s value. The process entails comparing the current share price to the share earnings. A high PE ratio implies that a stock is expensive and may fall after some time. The P/E ratio determines the firm’s performance during currency crises. In most cases, investors need to examine the comparative performance of international affiliates and local companies using this strategy. They may measure it using growth in sales and assets. When median sales for international affiliates and local firms are higher, the P/E ratio is high (Fathihani, 2020). In addition, the current price has its calculation based on the price of a stock. This illustrates how much investors want to pay. However, before deciding on the amount to pay, the P/E ratio shows whether the value precisely mirrors the firm’s earning potential.
Gross Dividend Yield
The gross yield of an investment is a standard quoted financial ratio that shows how much a company pays in dividends annually. Its calculation entails the acquired profit before deducting taxes and expenses. Outstandingly, gross yields compare the relative returns of all investments, including bonds and real estate. The dividend yield lets the investor know how much they expect to receive from the amount they invest (Scholl et al., 2021). A firm with a high dividend pays a hefty dividend, meaning investors enjoy high compensation. Most investors consider the highest yield as a sign of the financial capability of a company and its readiness to pay out dividends.
Coverage Ratio (CR)
Coverage ratio (CR) measures a firm’s ability to handle outstanding debts and agreements and make payments for products, dividends, and utility bills. Notably, it is the ratio of revenues to financial obligations. The coverage ratio considers the number of fiscal years for which the firm can make interest payments within its available earnings (Fathihani, 2020). In most cases, investors consider a firm to be in a good position if the profit is more than the liabilities. In this case, the chances of defaulting on loans or other financial obligations are negligible. A firm with a lower coverage ratio implies that its revenue cannot service its loans and other foreseen financial obligations. Such a circumstance lowers the firm’s market stock prices and wards off investors.
Earnings per Share
Earnings per share or EPS are determined by taking available net returns minus income attributable to other interests and dividing the result by average outstanding shares. Remarkably, this is the firm’s net income. Financial analysts believe that EPS is the most effective financial strategy for calculating or assessing a stock’s market price (Fathihani, 2020). In most cases, publicly traded firms release their earnings three or four times a year at the end of each quarter for financial analysts to predict their earnings per share. High earnings for each share significantly increase the stock price. The EPS is crucial for component investors. Firms implement it to understand the stocks with a higher rating.
Ratios in Financial Analysis
Financial analysts use earnings per share, price or earnings ratio, gross dividend yield, and coverage ratio to create and gain meaningful information about a firm. These ratios measure relationships between all components of financial statements. Through these aspects, a firm can analyze its financial position, liquidity, solvency, and profitability. Imperatively, a profitable and mission-led institution must define and outline the discussed items to attain its objectives. Remarkably, it is prudent for any managerial team to understand fully the role of these terms and how they can be applied to address company bottlenecks.
References
Fathihani, F. (2020). Effect of NPM, EPS, ROE, and PBV on stock prices. Dinasti International Journal of Management Science, 1(6), 893-902.
Scholl, M. P., Calinescu, A., and J. D. Farmer (2021). How to market ecology explains market malfunction. Proceedings of the National Academy of Sciences, 118(26), 1-9.
