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Dividend Cover Ratio
As we have already seen from the explanation of these two variables - earnings per share & dividend per share - they are important indicators to shareholders and investors of the performance of a company. However, taken together they can give us even more information. The combination of the two figures gives us the ratio that
is known as the dividend cover:-
| DIVIDEND COVER = |
Earnings per share
Dividend per share |
It is called the dividend 'cover' because it shows us literally how many times over the profits could have paid the dividend. For example, if the figure is 3, this means that the firm's profits (or earnings) were three times the level of the dividend paid out. So is this good news or bad news? Well not surprisingly, there is no simple answer to this! What did you
expect?
For investors looking for an income from their shares, it is probably bad news as it implies that the firm could have paid a considerably higher dividend from the level of profits earned. However, for an investor who is looking for future growth in the capital value of their investment it is probably good news as it implies that the firm has kept 2/3 of the profit back to re-invest
in the business.
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