CHAPTER 8 Analysis and interpretation of financial statements 347Companies seek to achieve growth in earnings per share as this signals to the market the company’s
earning ability. Companies are required to disclose their earnings per share at the bottom of their state-
ment of profit or loss, as well as the numerator and denominator used in the calculation. In recognition
of the importance of cash flows, the operating cash flow per share (CFPS) can be calculated. This ratio
reflects the net cash flows from operating activities that are available to pay dividends to shareholders
and fund future investments. The difference in the EPS and CFPS highlights the differences that arise
from preparing accounts on an accrual rather than a cash basis.
An investment in shares can generate returns in the form of dividends and/or share price appreciation.
The dividend per share (DPS) is the former measure of return and indicates the distribution of the com-
pany’s profits in the reporting period via dividends expressed relative to the number of ordinary shares
on issue. Like the EPS, the DPS is reported in a company’s financial statements.
The formulae below detail the basic calculations for these ratios.
Earnings per share:
Profit available to ordinary shareholders
=x cents/share
Weighted number of ordinary shares on issueOperating cash flow per share:
Net cash flows from operating activities − Preference dividends
=x cents/share
Weighted number of ordinary shares on issueDividend per share:
Dividends paid or provided to ordinary shareholders in the
current reporting period =x cents/share
Weighted number of ordinary shares on issueDividends can be distributed from current profits or from previous years’ profits. Most companies pay a
similar dividend each year or distribute a constant percentage of EPS as dividends. Expressing the DPS
as a percentage of EPS results in the dividend payout ratio, which indicates the proportion of current
year’s profits that are distributed as dividends to shareholders. The profit not distributed remains in the
entity for reinvestment.
Price earnings ratio
The price earnings ratio (PER) is a market value indicator that reflects the number of years of earn-
ings that investors are prepared to pay to acquire a share at its current market price. The formula for the
PER is:
Current market price
=x times
Earnings per shareIf a company’s current market price is $15.00 and its latest reported EPS is $2.50, the reported PER
would be six times. This suggests that market participants are prepared to pay six years of current earn-
ings to acquire the company’s shares. Price earnings ratios fluctuate as share prices change. The ratios
vary across industries and are normally higher for high-growth companies. It is useful to compare the
PER of a company with that of its competitors as this highlights the market’s assessment of the com-
pany’s future performance relative to its peers. As a general rule, price earnings ratios for industrial
companies are commonly between 10 and 15 times, although this alters according to the strength of the
equity market.