Some Useful Ratios and What They Mean

Earnings Per Share
This ratio is shown in the income statement. To get this ratio, the earnings is divided by the number of shares issued. So if the company has earnings of RM10million and there are 10 million shares issued, the earnings per share or returns to shareholders will be RM1 per share.

In practice, this calculation is usually far more complicated as the company can raise capital through preference shares or options. Earnings per share measures the true performance of the company as it takes into account the capital raised in order to achieve the earnings.

If a company's profits have been increasing over a number of years but the earnings per share have been decreasing, it means the company hasn't progressed in terms of increasing shareholders' wealth.

Price/Earnings (P/E) Ratio
The P/E ratio is a familiar ratio to most investors because it is often quoted in the newspapers. It relates the earning per share to the price of the share, by dividing the price by the earnings per share. So if the earnings per share of a company is10 sen, and the share price is RM1, the P/E ratio will be RM1/10sen which is 10. Essentially, what this means is that the company is earning 10 sen for every share but investors are willing to pay RM1 per share, i.e. they are paying 10 times more. The lower the P/E ratio, the better it is but the P/E ratio must not be read in isolation. It needs to be compared with the P/E ratio of other companies in the same industry, and even if a company has a high P/E, it may be doing very well in terms of paying dividends, growth in market capitalisation, growth in earnings and revenues. It may have no debt and may have a very healthy working capital. In other words, the P/E ratio must be read together with the other financial information.