Some companies offer bonuses to top management on the prices in the stock

Some companies offer bonuses to top management on the

This preview shows page 12 - 15 out of 21 pages.

interest in the performance of the shares of the company in the stock market. Some companiesoffer bonuses to top management on the prices in the stock market. a)Earnings per shareEarnings per share indicate the amount of income that a share will generate. An investoris, therefore, interested in knowing how much he or she will earn from the shares he orshe holds. (Marketwatch.com, 2015)From the table below, BP’s earning per share has been unstable over the five years. For instance, earning per share increased by 3.76% in 2013 and later on decreased by 6.16% in 2014. b)Price/earnings ratioThe price-earnings ratio is used to measure the amount of money that investors are ableand willing to invest in the company. A higher price-earnings ratio indicates a goodperformance and indicates that investors would be willing to invest in the company. Adividend is one of the modes of returns that an investor gains from investing in acompany. (Gulfbase.com, 2015) From the table below, price/earnings for BP plc have been performing fairly for the last five years.12| P a g e
Background image
c)Dividend yield Dividend ratio is a ratio that reports how much dividend a company pays compared to theprice of the share. (Kramer, 1996)From the table below, BP Plc’s dividend yield has been performing fairly for the last five years. d)Dividend coverThis ratio measures the capability of the company in paying dividends out of the profit that has been attributed to shareholders.From the table below, BP Plc dividend cover has been fluctuating for the last five years. Itreported a 2.84% decrease in 2014.A table of stock market performance ratios Summary of analysis13| P a g e
Background image
Limitations of using ratios to analyze the performance of a companyUndoubtedly, ratio analysis is a powerful tool that is used to analyze the performance ofany company. The management can utilize the information obtained from ratios and compare theperformance of the company to that of the competitors, as well as comparing the performance ofthe company to the previous trading periods. Such insight enables the management to identifythe weak areas. Investors also take advantage of the information obtained from ratio analysis tomake informed decisions before making an investing. However, ratio analysis has a fewshortcomings as discussed below. (Accountingtools.com, 2015). One of the limitations of using ratio analysis is the fact that the information used toprepare them is sourced from financial statements. For one, financial statements are preparedwithout taking into account inflation. The ratios, therefore, may not reflect the actual picture ofthe company at the time they are computed. Second, financial ratios are sourced from financialstatements that are historical in nature. The information reflected in the financial statements isrecorded in the past trading periods. This means that the values that are available may not be theexact ones at the time of computation. For instance, depreciation occurs with time. The value ofthe assets may have depreciated from the time that they are recorded in the financial statements
Background image
Image of page 15

You've reached the end of your free preview.

Want to read all 21 pages?

  • Fall '16
  • Becky Melton

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture