Shareholder Ratios Overview

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• Shareholder Ratios Overview

People that own a business are called shareholders because often they do not own all of the business, instead they own a part or share of the business. Businesses often raise money by selling part of the business, this part will be divided into small bits known as shares. Each share will be sold for a specific price based on how much the business as a whole is worth. Anybody that buys shares in a business is known as a shareholder.

People that have bought shares in a firm (shareholders) will be interested in how much money (return) the firm can generate for them. Shareholders receive a return from shares in two ways:

1. When the shares go up in value, so that if the shareholder decides to sell their shares, they will get back more money than they paid for the shares.
2. The second return is if the firm decide to give the shareholders some of the profit money it has made; this type of return is known as a dividend.

There are three ratios which analyse the return shareholders are receiving. Click on the links below to learn about each one.

Shareholder Ratios

1. The earnings per share ratio calculates the amount of money each ordinary share is making Earnings Per Share. People that have ordinary shares are entitled to vote at the firm's meetings, they will also be paid money (dividends) from the company's profits after the company has paid people with preference share.

2. The Earnings Ratio which is also known as the PE ratio compares the firm's share price against how much money each share is making. Click to learn how to calculate the Earnings Ratio
3. The Dividend Yield compares the dividends that shareholders are receiving against the market price of ordinary shares. Read on to learn more about the Dividend Yield.

Conclusion

A good return for shareholders isn't always an indication that a firm is doing well or is likely to do well in the future. This is because a good return for shareholders may be against the firm's interests. Firms need to carefully balance paying out shareholder dividends against investing the money back into the company for long term growth. Conversely do not assume that a poor shareholder return is an indication of a struggling business. Instead you should analyse Financial Ratios with the company's history, financial documents and future plans to get a full picture of how a firm is performing.