The Significant Trends for the Company’s Investor Ratios
It is known that there are many financial ratios intended to provide an insight into a company’s performance with different purposes. For instance, profitability ratios are often analyzed by investors who decide to buy a company’s stock or not. In this case, the significant financial trends can be revealed by examination of a set of profitability ratios. To begin with, the payout or dividends, which are a form of a company’s profit redistributing to its investors, directly influences retained earnings. This concept implies, by definition, a company’s profit before it pays dividends to its stakeholders (Nickolas, 2021). Thus, retained earnings are reduced by the amount paid to investors.
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Then, there is a degree of financial leverage (DFL) that is often utilized to measure a company’s earnings per share (EPS) sensitivity. DFL is calculated by dividing a company’s earnings before paying interest and taxes by its earnings before taxes. The higher DFL means that EPS, which is the value of the company’s outstanding shares after subtracting the paid preferred stock dividends, is more volatile (Nickolas, 2021). The dividends payable are not available to shareholders. It implies that DFL is not influenced by paying dividends off, as its calculations include another financial parameter. From the case’s investor ratios, it is known that the degree of financial leverage increased significantly from 0.08 to 0.53, which was provoked by the increase in EPS. It implies that the financial performance of the company improved.
The decrease in the Price/Earnings ratio may indicate that the company became more mature and less overlooked. The increase in the percentage of earnings retained is also a good tendency as it means that more people prefer to reinvest in the company. Finally, the decrease in dividend yield also indicates the maturity of the company, as the lower values of this ratio imply lower risks and profits compared to the higher values.
The Discussion of How the Investor Ratios will Affect External Stakeholders Behavior
From the perspective of management, it is possible to discuss how the investor ratios will affect external stakeholders’ behavior to outline the potential outcomes of the company’s performance and forecast the possibility of investments attraction. To begin with, the vital indicators all the external stakeholders consider before investing are financial profitability ratios. This parameter’s examination intends to discover whether the company generates competitive profit for its shareholders or not. As EPS increased significantly, the number of investors is expected to rise. The calculated 0,53 is a large value for DFL, which is a measure of EPS volatility. Most likely, external investors that tend to risk, especially professional ones, will be more interested in the company, while others choose another company to buy shares from. An opposite situation is with price/earnings ratio, dividend payout, and dividend yield, as all of them may indicate that the company is matured and can generate stable profit. Finally, the higher value of retained profit will positively influence all types of external investors as it measures the company’s constant profitability.
Nickolas, S. (2021). How Does Degree of Financial Leverage (DFL) Affect Earnings Per Share (EPS)? Investopedia.