Relevant ratios to help in investment decision-making

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SummaryAn equity investor can compute many ratios for a select company by using the numbers.

PE ratio compares the market price of a company with that of its earnings for a specified period while P/B ratio compares the market price of the company with that of its cumulative earnings and capital. One again needs to read the number in relation to the industry average.

Dividend measures

Dividend pay-out ratio and dividend yield are the two ratios that can be computed by those equity investors who would like to receive dividends on a regular basis. Dividend pay-out ratio is computed by dividing the dividend per share by the earnings per share. Higher the pay-out ratio, better is the performance of the company. Dividend yield is computed by dividing the dividend per share by the market price per share. Higher the dividend yield, better is the performance of the company.

The writer teaches accounting and finance courses at IIM Ranchi

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