Accounting for Managers: Interpreting accounting information for decision-making

INTERPRETING FINANCIAL STATEMENTS 87

This is a measure of how efficiently assets are utilized to generate sales. Investment
in assets has as its principal purpose the generation of sales.
Three other efficiency ratios are those concerning debtors’ collections, stock
turnover and creditors’ payments, which were covered in Chapter 6.

Shareholder return......................................

For these ratios we need some additional information:

Number of shares issued 100,000

Market value of shares £2.50

Dividend per share

dividends paid

number of shares

30 , 000

100 , 000

=£0.30 per share

Dividend payout ratio

dividends paid

profit after tax

30 , 000

70 , 000

=43%

Dividend yield

dividends paid per share

market value per share

0. 30

2. 50

=12%

Earnings per share

profit after tax

number of shares

70 , 000

100 , 000

=£0.70 per share

Price/earnings (P/E) ratio

market value per share

earnings per share

2. 50

0. 70

= 3 .57 times

The shareholder ratios are measures of returns to shareholders on their investment
in the business. The dividend and earnings ratios reflect the annual return to
shareholders, while the P/E ratio measures the number of years over which the
investment in shares will be recovered through earnings.