Earnings per share:The earnings per share (EPS) ratio indicates the earning of a common share in a year. This ratio enables investors to actually quantify and know the income earned by a share. This ratio enables investors to determine whether the shares they hold are reasonably priced. The ratio is arrived at by dividing the income attibutable to common shareholders by the weighted average of common shares.

Earnings per share Incomeattributable to common shareholders Weighted average number of common shares Cash Earnings per share It is often argued that the earnings per share is not a proper measure of the earning of a company as depreciation, tax and the cost of finance varies from one company to another and that true earnings should be calculated on the earning before depreciation, interest and tax. The cash earning per share is arrived at by dividing earning before depreciation, interest and tax (EDBIT) by the weighted average number of shares issued.

Cash earnings per share + EDBIT Weighted average number of shares issued.Dividend Per Share The dividend per share is often used as a measure to determine the real value of a share. Proponents of this school of thought argue that the earning per share is of no real value to anyone but those who can determine the policies of the company. The earning an investor makes is on the dividend that he receives. It is therefore submitted that the value of share should be a multiple of thedividend paid on that share.

How does one value the share? If one assumes that the earnings made by an investor would include an increase in the price of the share (capital appreciation) and income (dividend per share), the price would depend on the capital appreciation one expects. If the share has regularly appreciated by 30 per cent every year, a low dividend yield would be acceptable.

Conversely, if the share does not appreciate by more than five per cent and a 30 per cent return is required, a high dividend yield would be expected.Note that this method of valuation is so ridden with assumptions (appreciation every year and expected return) that it is rarely used.

Dividend Payout Ratio: The dividend payout ratio measures the quantum or amount of dividend paid out of earnings and enables an investor to determine how much of the earnings of a year is paid out as dividend to shareholders and how much is ploughed back into the company for its long term growth. This is an important ratio whenassessing a company's prospects because if all its income is distributed there would be no internal generation of capital available to finance expansion and to nullify the ravages of inflation and to achieve these the company would have to borrow. This ratio is calculated by dividing dividend by net income after tax.

Dividend Payout Ratio = Dividend Net Income after tax

Normally young, aggressive companies that are growing have low dividend payout ratios as they plough back their profits for growth. Mature companies on the other hand have high payouts. This is of concern as they may not be retaining capital to renew assets or grow. Bankers will check to ensure that the dividend is being paid out of current income and not out of retained earnings because that tantamounts to reducing the monies set aside for growth, expansion and replacement of assets.

Summary: Remember that earnings ratios are not indicators of profitability. They advise on the earnings per share, the company's dividend policyand the extent of income "ploughed back" for its expansion, growth and replacement of assets. It is critical to examine these ratios especially the EPS and the dividend payout. The EPS would help determine if the market price is reasonable. If the dividend payout ratios are very high bankers would be concerned as it can indicate that the management is not particularly committed to the long term growth and prospects of the company.