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Financial Accounting · Ratios

Investor Ratios: EPS, PE Ratio, Dividend Yield and Dividend Cover

Updated 11 October 2026 · Fact-checked

Investor ratios show shareholders what they earn and what they pay for it. EPS is profit for ordinary shareholders ÷ number of ordinary shares. PE is market price ÷ EPS. Dividend yield is dividend per share ÷ market price. Dividend cover is EPS ÷ dividend per share. Calculate EPS first, then the rest.

Understand Investor Ratios

Shareholders own the company. They care about three things: how much profit is earned for each share, how much cash they receive, and what price they pay for the share. Investor ratios answer these questions.

Earnings per share (EPS) is the profit that belongs to ordinary shareholders, divided by the number of ordinary shares in issue. The profit must be after tax and after any preference dividends, because preference shareholders are paid first. A higher EPS usually means more profit attributable to each share.

Price earnings (PE) ratio compares the market price of a share with its EPS. It tells you how many years of current earnings you are paying for. A high PE suggests the market expects growth or sees low risk. A low PE suggests lower expectations or higher risk. It only makes sense when compared with similar companies or with the same company over time.

Dividend yield is the cash dividend per share as a percentage of the market price. It is the cash return on the price an investor would pay today. Dividend cover compares profit with dividends. It shows how many times the company could pay the dividend from its earnings. A cover of 2 means profit available is twice the dividend paid. A low cover suggests the dividend may be hard to maintain, while a high cover means the company keeps much of its profit for reinvestment.

Yield and cover are different. Yield looks at the shareholder's return against the share price. Cover looks at how safe the dividend is against the company's profit.

Key formulas to remember

Earnings per share (EPS)
EPS = (Profit after tax − preference dividends) ÷ Number of ordinary shares in issue
Use the profit attributable to ordinary shareholders. Answer is usually in cents or dollars per share.
Price earnings (PE) ratio
PE = Market price per share ÷ EPS
Answer is a number of years (a multiple), not a percentage.
Dividend per share (DPS)
DPS = Ordinary dividends ÷ Number of ordinary shares in issue
Use ordinary dividends only, not preference dividends.
Dividend yield
Dividend yield = (DPS ÷ Market price per share) × 100%
Uses market price, not nominal value.
Dividend cover
Dividend cover = EPS ÷ DPS (or profit for ordinary shareholders ÷ ordinary dividends)
Answer is in times, such as 2.5 times.
Earnings yield (related)
Earnings yield = (EPS ÷ Market price) × 100%
The inverse of the PE ratio, shown as a percentage.

How to solve Investor Ratios questions

Use this order for any investor ratio question. It stops you mixing up profit figures and share counts.

  1. 1Read the question to see which ratio is asked and what units the answer needs (cents, dollars, %, times).
  2. 2Find the profit after tax from the statement of profit or loss.
  3. 3Deduct preference dividends (and preference finance costs if shown as dividends) to get earnings for ordinary shareholders.
  4. 4Find the number of ordinary shares. If the nominal value is given, divide share capital by nominal value per share.
  5. 5Calculate EPS, then DPS from the ordinary dividends.
  6. 6Use the market price given in the question for PE and yield. Do not use nominal value.
  7. 7Calculate the asked ratio and write the unit.
  8. 8If asked to comment, say what the figure suggests to a shareholder and compare it with a benchmark.

Quickest way: EPS first, then three one-line ratios

When to use it: Use in Section A objective tests when you have about two minutes per two-mark question and need a number fast.

  1. Write EPS and DPS at the top of your scrap paper.
  2. Compute EPS = ordinary earnings ÷ shares. Compute DPS = ordinary dividend ÷ shares.
  3. PE = price ÷ EPS.
  4. Yield = DPS ÷ price.
  5. Cover = EPS ÷ DPS.
  6. Check the units and rounding, then pick or enter the answer.

Common mistakes in Investor Ratios

  • Forgetting to deduct preference dividends before calculating EPS

    Students take profit after tax straight from the statement without reading the preference share details.

    Fix: Always ask: are there preference shares? If so, deduct their dividend first.

  • Using nominal value instead of market price in PE or yield

    Share capital and nominal value appear in the question, so they look usable.

    Fix: PE and dividend yield always use the current market price per share.

  • Counting preference shares in the share count

    Students divide total share capital by the nominal value.

    Fix: Use only ordinary share capital to get the number of ordinary shares.

  • Confusing dividend yield with dividend cover

    Both involve dividends and sound alike.

    Fix: Yield = DPS ÷ price (a percentage return). Cover = EPS ÷ DPS (a number of times).

  • Inverting a formula, such as DPS ÷ EPS for cover

    Students memorise the ratio names but not the direction.

    Fix: Remember cover asks how many times earnings cover the dividend, so earnings go on top.

  • Mixing units such as cents and dollars

    EPS may be in cents while the price is in dollars.

    Fix: Convert both figures to the same unit before dividing.

Worked examples

Example 1

A company has profit after tax of $540,000. It pays preference dividends of $40,000 and has 2,000,000 ordinary shares of $1 each. Ordinary dividends paid are $150,000. The market price is $3.75 per share. Calculate EPS, PE ratio, dividend yield and dividend cover.

Show the solution
  1. Earnings for ordinary shareholders = $540,000 − $40,000 = $500,000.
  2. EPS = $500,000 ÷ 2,000,000 = $0.25 per share (25 cents).
  3. PE = $3.75 ÷ $0.25 = 15.
  4. DPS = $150,000 ÷ 2,000,000 = $0.075 (7.5 cents).
  5. Dividend yield = $0.075 ÷ $3.75 × 100% = 2%.
  6. Dividend cover = $0.25 ÷ $0.075 = 3.33 times.

Answer: EPS 25 cents; PE 15; dividend yield 2%; dividend cover 3.33 times.

Example 2

A company has ordinary share capital of $800,000 in 50 cent shares and no preference shares. Profit after tax is $320,000. The directors propose a dividend of 8 cents per share. The share price is $2.40. Which is the dividend cover, and what is the dividend yield?

Show the solution
  1. Number of shares = $800,000 ÷ $0.50 = 1,600,000.
  2. EPS = $320,000 ÷ 1,600,000 = $0.20 (20 cents).
  3. DPS is given as 8 cents ($0.08).
  4. Dividend cover = 20 ÷ 8 = 2.5 times.
  5. Dividend yield = $0.08 ÷ $2.40 × 100% = 3.33%.

Answer: Dividend cover is 2.5 times and dividend yield is 3.33%.

Exam tips

  • Objective tests often give share capital and nominal value, not the number of shares. Work out the share count first.
  • Look for preference shares in the question before calculating EPS.
  • Write the unit beside every answer. Number entry questions may ask for cents, a percentage or times.
  • Use the market price for PE and yield, even when a nominal value is shown.
  • Check rounding instructions, and keep full figures in your workings until the last step.

Practice questions from Ratios

Investor Ratios in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investor Ratios: frequently asked questions

How do you calculate EPS for ACCA FA?

Take profit after tax, deduct any preference dividends, then divide by the number of ordinary shares in issue. In this exam you will generally use the year-end share number given in the question.

What is the difference between dividend yield and dividend cover?

Dividend yield is the dividend per share as a percentage of the market price, so it shows the cash return on the share price. Dividend cover is EPS divided by dividend per share, so it shows how safely profit supports the dividend.

What does a high PE ratio mean?

It means investors pay a high price relative to current earnings. This often reflects expected growth or low perceived risk, but it can also mean the share is overpriced. Compare it with similar companies.

Is a high dividend cover good?

It means the dividend is well supported by profit, so it looks safe. It can also mean the company pays out little and retains most profit, which may or may not suit shareholders.