9.9 Stock market related ratios

Hanumant Dhokle

Company Analysis

EPS (Earnings Per Share):

This is defined as:

Net Profit – Dividend Earned By Preference Shares /Number of Equity Shares

Since for most companies preference dividends are negligible or preference shares do not exist, we consider the net profit/number of equity shares to be approximately as the EPS. For instance, the net profit of Tata Iron and Steel Limited (TISCO) in 2002-03 was Rs 1,012.31 crore. Its equity was Rs 367.97 crore. As the face value of each TISCO share is Rs 10, the number of equity shares is 367.97/10, i.e. 36.79 crore. So, the EPS would be 1,012.31/36.79 = Rs 27.51. Relevance of EPS: One of the challenges of evaluating stocks is establishing an “apples to apples” comparison. What I mean by this is setting up a comparison that is meaningful so that the results help you make an investment decision. Similarly, comparing the earnings of one company to another really doesn’t make any sense, if you think about it. Using the raw numbers ignores the fact that the two companies undoubtedly have a different number of outstanding shares.

For example, companies A and B both earn Rs 100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stocks do you want to own? It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide that by the outstanding shares.

EPS = Net Earnings / Outstanding Shares

Using our example above, Company A had earnings of Rs 100 and 10 shares outstanding, which equals an EPS of 10 (Rs 100 / 10 = 10). Company B had earnings of Rs 100 and 50 shares outstanding, which equals an EPS of 2 (Rs 100 / 50 = 2). So, you should go buy shares of Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock.

Book Value (BV) Per Share:

This is defined as:

Equity Capital + Shareholder’s Reserves
(Excluding Revaluation Reserves)
-----------------------------------------------
Number Of Equity Shares


For instance, TISCO’s free reserves + Equity Capital (i.e. shareholders’ reserves excluding revaluation reserves) was Rs 2,022.75 crore. So, its book value per share is 2022.75/36.79 = Rs 54.98. As you will observe, if a company (generally newly started ones) does not accumulate any reserves, its book value will be equal to face value. If TISCO’s free reserves were zero the book value per share would have been (367.97 + 0)/36.79 = Rs 10 which is its face value. If a company has past losses carried in the balance sheet, its reserves become negative. In that case, the book value per share will be less than its face value. Sometimes when losses are too high, the book value may even become negative.

CEPS (Cash Earnings per Share):

This is arrived at through

Net Profit + Depreciation
-----------------------------
Number of Equity Shares

TISCO has a depreciation value of Rs 555.48 crore. Hence, its CEPS would be (1,012.31 + 555.48)/36.79 = Rs 42.61.

HEPS (Half-Yearly Earnings Per Share):

This is defined as:

Net Profit As Given In the Half Yearly
Performance Statement
-----------------------------------------------
Number of Equity Shares


You can multiply the HEPS by 2 to estimate the annualized EPS for the entire year.

Dividend per Share (Rs):

This is obtained by dividing the dividend by the number of equity shares.


Dividend (%):

This is defined as:

Dividend per Share
-------------------------------- X 100
Face Value of Each Share


Dividend Yield (%):

This ratio gives the return in terms of dividend you receive by buying a share at the market price. This is defined as

Dividend per Share
------------------------------X 100
Market Price per Share


Payout Ratio:

It gives the percentage of profits apportioned by the company as dividends to its shareholders. The lower the ratio, more conservative is the company in paying dividends. However, companies with low payout build solid reserves and surplus for future projects.

Payout (%) = Dividend per share * 100 / Earnings per Share

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