Strategic Financial Management

STRATEGIC FINANCIAL MANAGEMENT

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Investing in a company or security calls for a thorough knowledge of the said security . This is the reason why an investor must consider and evaluate several key aspects of the investment e .g . financial ratios

The essence of this is to gauge the performance of the security by establishing trends on the performance and make comparisons with the other industry players

The ratios that Upholland Plc considers before investing in Orrell include the following

Dividend per share

p Dividend cover

Earning per share

Price earnings ratio

Debt /equity ratio

Interest cover

Dividend per share

Shareholders in a company demand a reward for assuming the risks associated with the investment . These rewards can be in form of dividends , bonus issue e .t .c

The profit after tax that the company generates is basically the stockholders return . However , the company can , for one reason or another , pay out to the share holders only a portion of these earnings attributable to stockholders . This paid out portion is what is called dividends . The dividend per share is arrived at by dividing the amount dividends by the average number of equity stockholders (Biz /ed 2008

DPS dividends paid to equity shareholders

Average number of issued equity shares 10 ,000 ,000

25 ,000 ,000 ch0 .5 0 .2

Dividend cover

As seen earlier , companies usually do not pay out all the profit attributable to shareholders as dividends . This is because they may want to retain some profits to invest in new profitable opportunities

The company thus pays only a portion of these profits the equity holders . Investors require a consistent return on their investment and therefore the dividends should be secure i .e . the dividend payout should not drop in the future . Dividend cover ratio can be used by the investors to evaluate the security of the dividends

Dividend cover is calculated by dividing the profits after tax by the amount of dividends actually paid out

Dividend cover profit after tax

Dividend paid out

11 ,150 ,000

10 ,000 ,000 1 .115 times

Earning per share

EPS is calculated by dividing the profit after tax and preference dividends with the average number of outstanding common shares at the end of the accounting period

EPS profit after tax and dividend

Average outstanding shares

11 ,150 , 000

50 ,000 ,000 0 .223

EPS indicates the level of profitability of the company . The higher the EPS the more profitable the company is . EPS can also be used to calculate the company 's share price

There are two forms of EPS basic and diluted EPS . Basic EPS only considers the number of shares at the end of the period while diluted EPS includes the shares resulting from the exercise of stock options warrants , and preference shares and convertible bonds (Little , K . 2008

Price earning ratio (P /E ratio

It is arrived at by dividing the market price the shares with the earnings per share

P /E MPS

EPS

It is simple...