Topic 2c Market Ratios.pptx

Topic 2c Market Ratios.pptx - Analysing Performance with...

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Analysing Performance with Ratios Topic 2c – Market Based Ratios
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Market Analysis : Market Based Ratios Market data can be used to help interpret the accounting data Market value provides base against which to compare earnings More relevant to market participants - shareholders Reflects markets assessment of risk & growth prospects for firm relative to market
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Earnings Per Share - EPS Basic EPS - for firms without convertibles in the capital structure EPS = Net Income - Pref Dividends Weighted No. Ord Shares Outstanding Denominator reflects daily average of ordinary shares issued adjusted for new issues and bonus issues. (see McNamara & Duncan Chapter)
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Problem EPS alone does not consider the investment required. Difficult to compare across firms Must EITHER relate to price or asset backing per share (i.e. scale so comparable)
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Price-Earnings Ratio PE = MARKET VALUE PER SHARE EARNINGS PER SHARE
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Problems A low value for one of these ratios could indicate either Numerator is inflated or transient (reflects one-off events) OR Denominator is inflated or transient
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