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Dividend cover represents ordinary dividend cover. A high cover gives the confidence to the ordinary shareholders that they will get adequate return on their shareholdings 3.Dividend per Share(DPS) The dividend per share is the earnings distributed to ordinary shareholders divided by the number of ordinary shares. It is expressed as under:- 4.Dividend Pay Out Ratio This ratio is calculated as under:- Dividend Payout Ratio = Dividends per share * 100 Earnings per share This ratio represents the, dividend as a percentage of earnings per share. It shows the company’s retention policy. If dividend payout ratio is low then the retention percentage is high and vice versa. 5.
Earnings per share The total earnings per share attributable to ordinary shareholders whether distributed or retained, are shown by this ratio
Earnings per share (E.P.S) = Net profit tax and preference dividends * 100 Number of ordinary shares OR Total earnings attributable to ordinary shareholders * 100 Total market price of shares issued This ratio represents the earnings as a percentage to the market price of shares. If this ratio is high then it is considered favourable and vice versa INTERPRETATION OF RATIOS The interpretation and analysis of accounting or financial ratios are the most difficult problems. An adequate financial analysis involves more than an understanding and interpretation of each of the individual ratios. The analyst should have enough skill, insight and experience in the analysis and interpretation of financial statements. The analyst should also take into consideration the following factors in addition to the information contained in the financial statements General economic condition of the firm Risk acceptance Future expectations Future opportunities Analysis and interpretation system used by other firms in the industry Accounting system of the industry The interpretation of the ratios can be made by comparing them with:- a.Previous figures-Trend analysis b.Similar firms-Inter-firm comparisons c.Targets-Individual ratio set to meet the objective Trend Analysis The analyst usually uses historical standards for evaluating the performance of the firm. The historical standards represent the financial ratios computed over a period of time-Trend. The
trend analysis provides enough clues to the analyst for proper evaluation of the financial ratios. However, the changes in a firm’s policies over the period must be considered while interpreting ratios from comparisons overtime. Furthermore, the average of the ratios for several years can also be used for this purpose Inter-Firm Comparison Inter-firm comparisons may claim the comparisons of similar ratios for a number of different firms in the same industry. Such an attempt would facilitate the comparative study of financial position and performance of the firms in the industry. The published ratios of trade associations or financial institutions can be of great help to the analyst in the interpretation of the financial ratios. However, the variations in accounting system and changes in the policies and procedures