Investment ratios: EPS, P/E, dividend per share, yield and cover

The formulas (from the specification)

What they tell an investor

• EPS: profit earned for each ordinary share. Rising EPS is a good sign; compare over time rather than between companies with different share structures.
• P/E: how many years of current earnings the market price represents. A high P/E means investors expect growth (or the shares are expensive); a low P/E suggests low expectations or a bargain.
• DPS: the cash return per share.
• Dividend yield: the cash return as a percentage of the share price, comparable with interest on savings.
• Dividend cover: how many times the dividend could be paid out of earnings. High cover means the dividend is safe and profits are being retained; low cover (close to 1) means most profit is paid out and the dividend may be cut if profits fall.

Exam warnings

• Units: EPS and DPS in pence (or £), P/E and cover in times, yield in %. Examiners withhold marks for missing units (an answer of 0.20 did not get the final mark; '£0.20' or '20 pence' is needed).
• Number of shares = share capital / nominal value. £10m of £0.50 shares = 20m shares.
• Total ordinary dividend = interim + final paid for the year.
• Use the number of shares after any issue during the year if the question says so.

Worked example

Profit after tax £3,600,000; 6% preference shares £2,000,000; ordinary share capital £10,000,000 in £0.50 shares; interim dividend 2p and final dividend 3p per share; market price £2.61. Calculate all five ratios.

1. Shares = 10,000,000 / 0.50 = 20,000,000; preference dividend = 6% x 2,000,000 = £120,000
2. EPS = (3,600,000 - 120,000) / 20,000,000 = 17.4p
3. P/E = 261p / 17.4p = 15 times
4. DPS = 2p + 3p = 5p (total dividend £1,000,000)
5. Dividend yield = 5 / 261 x 100 = 1.92%
6. Dividend cover = 3,480,000 / 1,000,000 = 3.48 times

Answer: EPS 17.4p; P/E 15 times; DPS 5p; yield 1.92%; cover 3.48 times

Check yourself

1. Profit after tax £2,450,000, preference dividends £150,000, 10,000,000 ordinary shares. Calculate EPS in pence.
   Show answer

   23.0 p. (2,450,000 - 150,000) / 10,000,000 = £0.23 = 23p.

2. EPS is 18p and the market price is £2.70. Calculate the P/E ratio.
   Show answer

   15.0 times. 270 / 18 = 15 times.

3. Ordinary share capital is £12,000,000 in shares of £0.25. Total ordinary dividends are £1,920,000. Calculate the dividend per share in pence.
   Show answer

   4.0 p. Shares = 48,000,000; DPS = 1,920,000 / 48,000,000 = £0.04 = 4p.

4. Dividend per share is 9p and the market price is £3.60. Calculate the dividend yield as a percentage.
   Show answer

   2.50 %. 9 / 360 x 100 = 2.50%.

5. Profit after tax £1,800,000, preference dividends £200,000, ordinary dividends £640,000. Calculate dividend cover.
   Show answer

   2.50 times. 1,600,000 / 640,000 = 2.50 times.

6. Company X has a P/E ratio of 28 and company Y, in the same industry, has a P/E of 9. What does this most likely suggest?
   • X is less profitable than Y
   • Investors expect X's earnings to grow faster
   • Y pays higher dividends
   • X has more shares in issue
   Show answer

   Investors expect X's earnings to grow faster. A high P/E means investors pay more per £1 of current earnings, usually because they expect growth.

7. Dividend cover has fallen from 4.0 times to 1.1 times. What does this indicate?
   • The dividend is now safer
   • The share price must have risen
   • The company has issued more preference shares
   • Most profit is now paid out, so the dividend is at greater risk if profits fall
   Show answer

   Most profit is now paid out, so the dividend is at greater risk if profits fall. Cover close to 1 leaves little margin; a fall in profit could force a cut.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (XAC11/YAC11), Issue 2
• Pearson Edexcel IAL Accounting WAC12 Unit 2 mark scheme, June 2022
• Pearson Edexcel IAL Accounting WAC12 examiners' report, October 2022

Last updated 8 November 2026. Spotted a mistake? Tell us.