A LevelAccountingCambridge (CIE)Revision NotesFinancial AccountingAnalysis & Communication of Accounting InformationInvestment Ratios (Stock Exchange Ratios)

Investment Ratios (Stock Exchange Ratios) (Cambridge (CIE) A Level Accounting): Revision Note

Exam code: 9706

Dan Finlay

Written by: Dan Finlay

Reviewed by: Lucy Kirkham

Updated on

What are investment ratios?

  • Investment ratios measure the efficiency, profitability, or valuation of an investment

    • They compare the profit to its cost, or the share price to its earnings

  • You need to know the following investment ratios:

    • Earnings per share

    • Price/earnings ratio

    • Dividend per share

    • Dividend yield

    • Dividend cover

Earnings per share & price/earnings

What is earnings per share?

What is the formula?

fraction numerator Profit space for space the space year over denominator Number space of space issued space ordinary space shares end fraction

How should the value be written?

Write as an amount ($X)

How should the value be rounded?

Round to two decimal places

What does the value mean?

The value shows how much each share would get if the profit were fully shared between all shares

  • Investors look for companies with high earnings per share

    • This is because the company has more profits to potentially pay dividends

What is the price/earnings ratio?

What is the formula?

fraction numerator Market space price space per space share over denominator Earnings space per space share end fraction

How should the value be written?

Write as a number of times (X times)

How should the value be rounded?

Round to two decimal places

What does the value mean?

The value shows how many times the annual earnings investors are prepared to pay for one share

  • If the price/earnings is high

    • The market expects strong future growth

    • Investors are willing to pay a premium

  • If the price/earnings is low

    • The market has lower expectations

    • Shares might be undervalued or the company is declining

Worked Example

X plc has provided the following information for the year ended 31 December 2025.

$

Ordinary share capital ($1.50 shares)

600 000

Share premium

50 000

Retained earnings

44 000

  • An interim dividend of $0.14 per share was paid on 1 October 2025.

  • The balance of the retained earnings at 1 January 2025 was $40 000.

  • No additional shares were issued during the year.

  • The market price per share at 31 December 2025 was $3.55.

Calculate, to two decimal places:

(i) the earnings per share

(ii) the price/earnings ratio.

Answer:

(i)

  • Calculate the number of shares

fraction numerator $ 600 space 000 over denominator $ 1.50 end fraction equals 400 space 000

  • Calculate the total interim dividend payment

400 space 000 cross times $ 0.14 equals $ 56 space 000

  • Calculate the profit for the year

    • Subtract the opening balance from the closing balance of the retained earnings

    • Add the dividend paid

$

Retained earnings at 31 Dec 2025

44 000 

Retained earnings at 1 Jan 2025

(40 000)

Dividend paid

56 000 

Profit for the year

60 000 

  • Calculate the earnings per share

    • fraction numerator Profit space for space the space year over denominator Number space of space issued space ordinary space shares end fraction

fraction numerator 60 space 000 over denominator 400 space 000 end fraction equals 0.15

$0.15 per share

(ii)

  • Calculate the earnings per share

    • fraction numerator Market space price space per space share over denominator Earnings space per space share end fraction

fraction numerator 3.55 over denominator 0.15 end fraction equals 23.666666...

  • Round to two decimal places

23.67 times

Dividend per share & dividend yield

What is dividend per share?

What is the formula?

fraction numerator Annual space ordinary space dividend over denominator Number space of space issued space ordinary space shares end fraction

where

Annual space ordinary space dividend equals interim space dividend space paid plus final space dividend space proposed

How should the value be written?

Write as an amount ($X)

How should the value be rounded?

Round to two decimal places

What does the value mean?

The value shows the amount of dividend awarded for each share

  • You can split the calculation into two calculations

    • One for the interim dividend payment

    • One for the proposed final dividend

  • The exam question might give you one of them and ask you to find the other

    • Just make sure to check how many shares are issued

Examiner Tips and Tricks

Be careful to only include dividends relating to the financial year. Sometimes during the year, the final dividend for the previous year is paid. This would affect the statement of changes in equity, but this does not affect this ratio.

What is dividend yield?

What is the formula?

fraction numerator Dividend space per space share over denominator Market space price space per space share end fraction cross times 100

How should the value be written?

Write as a percentage (X%)

How should the value be rounded?

Round to two decimal places

What does the value mean?

The value shows the return an investor receives from dividends as a percentage of the current share price

  • Investors look for companies which have a higher dividend yield

    • However, if the yield is very high, then this can signal that the share price has fallen rapidly

      • There could be concerns about the company

  • If the dividend yield decreases, then:

    • the share price might have increased faster than the dividends

    • or the dividends might have been cut

Worked Example

Y plc has provided the following information for the year ended 31 December 2025.

$

Ordinary share capital ($2 shares)

1 000 000

  • A final dividend of $0.12 per share for 2025 was proposed at the year end. Dividends paid during the year comprised a final dividend of $90 000 for 2024 and an interim dividend of $80 000 for 2025.

  • No additional shares were issued during the year.

  • The market price per share at 31 December 2025 was $4.25.

Calculate, to two decimal places:

(i) the dividend per share

(ii) the dividend yield.

Answer:

(i)

  • Calculate the number of shares

fraction numerator $ 1 space 000 space 000 over denominator $ 2 end fraction equals 500 space 000

  • Calculate the dividend per share for the interim dividend

fraction numerator $ 80 space 000 over denominator 500 space 000 end fraction equals $ 0.16

  • Add this to the proposed final dividend per share for 2025

    • Ignore the final dividend for 2024

$ 0.16 plus $ 0.12 equals $ 0.28

$0.28 per share

(ii)

  • Calculate the dividend yield

    • fraction numerator Dividend space per space share over denominator Market space price space per space share end fraction cross times 100

fraction numerator 0.28 over denominator 4.25 end fraction cross times 100 equals 6.588235...

  • Round to two decimal places

6.59%

Dividend cover

What is dividend cover?

What is the formula?

fraction numerator Profit space for space the space year space available space to space pay space ordinary space dividend over denominator Annual space ordinary space dividend end fraction

How should the value be written?

Write as a number of times (X times)

How should the value be rounded?

Round to two decimal places

What does the value mean?

The value shows how many times the profit after tax could cover the dividends paid

  • This ratio indicates the sustainability of the dividend and how much profit is being retained

    • If it is above 2 times

      • It is sustainable as substantial profit is being retained after the dividend

    • If it is around 1.5 to 2 times

      • It is an acceptable level

    • If it is below 1 times

      • It is unsustainable in the long run as the dividend is being paid out of the reserves

Why might directors want to increase dividend cover?

  • Increasing dividend cover means retaining more profit in the business

  • Retained profit can be used for business expansion without the need for additional borrowing

  • If the company has a higher dividend cover, then it can maintain dividend levels even if profits fall in future years

  • Directors want assurance that the business can sustain the current dividend level going forward

Worked Example

Z plc has provided the following information for the year ended 31 December 2025.

$

Ordinary share capital ($1.50 shares)

750 000

Profit from operations

180 000

Profit for the year (after interest and tax)

120 000

  • A final dividend of $0.11 per share for 2025 was proposed at the year end.

  • An interim dividend of $0.10 per share was paid in October 2025.

  • No additional shares were issued during the year.

  • The market price per share at 31 December 2025 was $4.25.

Calculate, to two decimal places, the dividend cover.

Answer:

  • Calculate the number of shares

fraction numerator $ 750 space 000 over denominator $ 1.50 end fraction equals 500 space 000

  • Calculate the annual ordinary dividend paid

$ 0.11 plus $ 0.10 equals $ 0.21 space per space share $ 0.21 cross times 500 space 000 equals $ 105 space 000

  • Calculate the dividend cover

    • fraction numerator Profit space for space the space year space available space to space pay space ordinary space dividend over denominator Annual space ordinary space dividend end fraction

fraction numerator 120 space 000 over denominator 105 space 000 end fraction equals 1.142857...

  • Round to 2 decimal places

1.14 times

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Author
Reviewer
Dan Finlay

Author: Dan Finlay

Expertise: Maths Subject Lead

Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.

Lucy Kirkham

Reviewer: Lucy Kirkham

Expertise: Head of Content Creation

Lucy has been a passionate Maths teacher for over 12 years, teaching maths across the UK and abroad helping to engage, interest and develop confidence in the subject at all levels.Working as a Head of Department and then Director of Maths, Lucy has advised schools and academy trusts in both Scotland and the East Midlands, where her role was to support and coach teachers to improve Maths teaching for all.