financial accounting - management accounting - financial management - analysis and interpretation of financial statement

1. Dr. Mohamed Kutty Kakkakunnan
Associate Professor
P G Dept. of Commerce
N A M College Kallikkandy
Kannur – Kerala - India

2. Market Test Ratios
 Ratios relate the firms share price to its earnings
and book value
 An indicator the feelings, anticipations and
thoughts of investors with the company’s past
performance and future prospects
 If the firm’s profitability, solvency and activity ratios
are good, then the market based ratios will be high
and share price is expected to be high

3. Important Market Based Ratios
1. Earnings Per Share
 Shows the relationship between earning available to equity
shares and number of equity shares.
 An important measure of economic performance
 Outsiders who have no access to the internal information,
consider EPS as a best base for making investment
 EPS is important determinant of the market value of shares
 A constant increase in EPS is an indicator of growth and
profitability of the firm

4. 2. Dividend Payout Ratio
 Shows relationship the dividend per share and earnings per
share
 Entire earnings will not be distributed as dividend a part is
retained
 Indicates the extent of the net profits distributed to the
shareholders as dividend.
 Indicator of the dividend policy
 High payout ratio – liberal dividend policy low payout ratio –
conservative dividend policy

5. 3. Dividend Yield Ratio
 Shows the percentage relationship between dividend earned
per share and market price per share
 Reflects the percentage yield that an investor receives on is
investment at the current market price of the shares
 More important when investors hope to receive dividend
that capital appreciation

6. 4. Price Earning Ratio (P/E Ratio)
 shows the relationship between market price per share and
earnings per share
 Measures the number of times the MPS is higher than that
of EPS. Indicates how much an investor is prepared to pay
per rupee of earnings
5. Cover for the preference dividend
Profit after tax ÷ Preference dividend
6. Cover for equity dividend
Profit after tax and pref. share dividend ÷ equity
dividend