Also known as Leverage
Analysts look at the ratio between long term debt and the shareholders funds
This is the relationship between borrowed money (debt) and shareholder's money (equity)
This is called leverage in the US
A high-geared company is one which has a large amount of borrowed money in relation to its equity or its shareholder's funds
A low geared company has large equity small borrowings
The appropriate mix depends on the type of business.
Balance Sheet Gearing
This is borrowings as a percentage of shareholder funds and is also known as leverage in the US.
This is the ratio between the long-term debt of a company and the shareholder's funds (or equity).
People are normally worried if the ratio reaches 100% as interest always has to be paid regardless of whether the company is mksing good profits.
If the business is cyclical then analysts worry more than if it's a steady business.
A high geared company is one which has a large amount of borrowed money in relation to equity.
A low geared company has a large equity and few borrowings.
Balance Sheet Gearing = Interest Paid / Shareholder Funds
How much off the operating profit is used to pay off the interest of any borrowings.
High income gearing might be appropriate for a company whose income is very stable
Income Gearing = Interest Paid / Operating Profit
Gearing or leverage
(relationship between debt and equity)
Borrowing money allows a company to increase trading without being limited to just the shareholders funds.
For equity analysts it is therefore important to consider the ratio of long term debt to equity
This is also known as dividend or gorss yield. This is the dividend as a percentage of the stock price.
This can be thought of as "the return". This gives the investor an indication of the income he might expect on his shared.
Yield = Gross Dividend Per Share / Current Share Price
Eg 20p / 400p (share price) = 5% dividend yield
An investor focusing on income might select high yielding shares.
A company with a high yield will probably not increase its profits very quickly or it is a company with quite a lot of risk
A low yielding company might suggest that it is fast growing
Investors are prepared to accept a low income today if there is a chance of rapid growth and higher profits.
If the profits are not going to rise significantly then Investors will want a higher yield today.
If the share price rises the yield will fall.
The Price/Earnings ratio of a company measures the valuation of a company by relating the earnings per share to the price of the shares.
This is the ratio of the stock price to the earnings of the company, per share.
A high PE ratio means that investors believe that the company has good growth prospects.
A high P/E suggests investors are willing to pay a higher price because they believe the company has great propects.
Very useful for comparisons
It is a way of measuring how highly investors value the earnings of a company
PE = Current Share Price / Earnings per share (EPS)
They also say "X times earnings" or " on a multiple of X"
All else being equal, a high PE ratio suggests a growth company.
A low PE suggests a company wth a more static profits outlook or a company in a high risk area.
If the share price rises so does the PE
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