Definition of some basic terms as used in investment in shares;
Dividends Per share
The dividend per share of a company basically refers to the total dividend the company pays divided by the total shares it has outstanding. It is similar to the earnings per share except that as against earnings, dividends is the numerator. Dividend per share is also a very important terminology as it tells an investor how much of the company’s dividend he is receiving on a per share basis. The dividend you get per share should also be compared with dividends the company declares in the past and what its peers have declared as well. This helps you determine if you are getting a good value on your return.
Price Earning Ratio
The Price Earnings Ratio (P.E ratio) represents the price of a share relative to its earnings per share . To calculate the Price Earnings ratio, you will have to divide the share price of a stock by its earnings per share. The result you get determines how much you are willing to pay to claim part of the profits of the company. For example, if earnings per share is N2 and the price of a stock is N50, the Price earnings ratio is 25x. Thus if you buy the stock at that price you have agreed that the company’s share price of N50 is worth 25x its earnings per share. The P.E ratio can change daily depending on the current share price of the stock
Dividend Yield
Dividend yield is the dividend per share of a company divided by the market price per share. For example, a company paid a dividend per share of N1 and has a current market price of N50 per share. Dividing the dividend per share of N1 by the market price per share of N50 gives you a dividend yield of two percent (2%). As such, if you have determined dividends as your major source of investment for the stock you would only be getting a return of two percent (2%) per annum. Comparing that to other investments options such as treasury bills and bonds which pay about ten percent (10%) to fourteen (14%) respectively in yields suggest you are not getting good value. Therefore, for the company to match the ten percent (10%) treasury bills are paying it will have to pay dividend of N5 which is 5x its current dividend per share. Stocks quoted on the Nigerian stock exchange typically pay an average dividend yield of 5%
Net Asset Per Share
This Net Asset Per Share also known as Book value per share is calculated by dividing the Net Assets or equity of a company divided by its outstanding shares. If your business is worth N1million and you have 100,000 shares in issue then your Net Asset per share is N10. It is a very important tool that can be used to determine the value of a company. Using the same example above, the share price of N50 basically means that you are valuing the company at 5x its net assets. In other words you are willing to pay a premium of five hundred percent of the company’s equity just to own a share of that company. It is important to note that the Net assets per share of a company relates to its past and does not take cognizance of the future value the company can create. This why share prices mostly trade at a premium to net assets per share and when it trades a discount investors often sees it as undervalued.
Dividends Per share
The dividend per share of a company basically refers to the total dividend the company pays divided by the total shares it has outstanding. It is similar to the earnings per share except that as against earnings, dividends is the numerator. Dividend per share is also a very important terminology as it tells an investor how much of the company’s dividend he is receiving on a per share basis. The dividend you get per share should also be compared with dividends the company declares in the past and what its peers have declared as well. This helps you determine if you are getting a good value on your return.
Price Earning Ratio
The Price Earnings Ratio (P.E ratio) represents the price of a share relative to its earnings per share . To calculate the Price Earnings ratio, you will have to divide the share price of a stock by its earnings per share. The result you get determines how much you are willing to pay to claim part of the profits of the company. For example, if earnings per share is N2 and the price of a stock is N50, the Price earnings ratio is 25x. Thus if you buy the stock at that price you have agreed that the company’s share price of N50 is worth 25x its earnings per share. The P.E ratio can change daily depending on the current share price of the stock
Dividend Yield
Dividend yield is the dividend per share of a company divided by the market price per share. For example, a company paid a dividend per share of N1 and has a current market price of N50 per share. Dividing the dividend per share of N1 by the market price per share of N50 gives you a dividend yield of two percent (2%). As such, if you have determined dividends as your major source of investment for the stock you would only be getting a return of two percent (2%) per annum. Comparing that to other investments options such as treasury bills and bonds which pay about ten percent (10%) to fourteen (14%) respectively in yields suggest you are not getting good value. Therefore, for the company to match the ten percent (10%) treasury bills are paying it will have to pay dividend of N5 which is 5x its current dividend per share. Stocks quoted on the Nigerian stock exchange typically pay an average dividend yield of 5%
Net Asset Per Share
This Net Asset Per Share also known as Book value per share is calculated by dividing the Net Assets or equity of a company divided by its outstanding shares. If your business is worth N1million and you have 100,000 shares in issue then your Net Asset per share is N10. It is a very important tool that can be used to determine the value of a company. Using the same example above, the share price of N50 basically means that you are valuing the company at 5x its net assets. In other words you are willing to pay a premium of five hundred percent of the company’s equity just to own a share of that company. It is important to note that the Net assets per share of a company relates to its past and does not take cognizance of the future value the company can create. This why share prices mostly trade at a premium to net assets per share and when it trades a discount investors often sees it as undervalued.
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