Introduction:
Ratio Analysis
• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.
• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.
The key metrics mentioned above include the following:
• Return on Shareholders’ Equity – A measure of the total earnings of the equity share holders in proportion to the share capital introduced by them.
• It seeks to measure the proportion of the total earnings in relation to the investment made and is an effective way to evaluate how profitable the investment in the company is.
• Price Earnings Ratio – A comparative measure of the Price of equity shares or common stock as compared to the earnings per share.
• It seeks to measure the multiple between the price and earnings per share. The greater the P/E ratio, the higher is the market price and investor expectations from the stock.
• Dividend Yield Ratio – A comparative measure of the Price of equity shares or common stock as compared to the dividend per share.
• It seeks to measure the multiple between the price and dividend per share. The greater the Dividend Yield ratio, the higher is the market price and investor expectations from the stock.
To Calculate:
a) Return on Common
b) Price Earnings Ratio
c) Dividend Yield Ratio for December 2016 and 2017.
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Chapter 17 Solutions
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