BUSF_A01.qxd

Chapter 3 • Financial statements and their interpretation

Interest cover ratio

The ratio for Jackson plc for 2008 is:

=4.5 times

This ratio looks at how many times the interest could be met from the profits. It is

therefore some measure of how easily the business is able to meet its interest payment

obligations.

Investors’ ratios

Investors’ ratios are concerned with looking at the business from the point of view of

a shareholder, perhaps owning shares in a stock exchange listed business. These ratios

are of the type that appear in the financial pages of newspapers. Two of those that we

shall be considering are partly based on the current market price of the shares. We

shall work on the basis that Jackson plc’s ordinary shares had a market value of £5.10

on 31 December 2008.

Earnings per share ratio

The ratio for Jackson plc for 2008 is:

=£0.39 (or 39p) per share

The earnings per share figure is the profit attributable to each share. It is not the div-

idend paid per share, unless all of the profit is paid as a dividend, which would be

unusual. We should bear in mind that the profit, or at least the wealth represented by

that profit, belongs to the shareholders whether it is paid to them or not. In Chapter

12 we shall consider whether shareholders prefer to receive dividends or to ‘plough

back’ their profits.

Price/earnings ratio

The ratio for Jackson plc at 31 December 2008 is:

=13.1

5.10

0.39

Current market price per share

Earnings per share

78

200

Profit for the year

Number of ordinary shares

135

30

Operating profit

Interest charges