Business Finance · Interpreting company accounting information

Investor Ratios and Market Measures: EPS, P/E, Dividend Yield and Cover

Updated 11 October 2026 · Fact-checked

Investor ratios show shareholders what they earn and pay for a share. Earnings per share is profit for ordinary shareholders ÷ number of ordinary shares. P/E is share price ÷ EPS. Dividend yield is dividend per share ÷ share price. Dividend cover is EPS ÷ dividend per share. Compute each, then interpret it.

Understand Investor Ratios and Market Measures

Investors do not only ask whether a company is profitable. They ask how much profit belongs to each share, what the market charges for that profit, and how much cash comes back as dividends. Investor ratios answer these questions. They link the company accounts (profit, dividends, share count) to the market (share price).

Earnings per share (EPS) is the profit available to ordinary shareholders divided by the number of ordinary shares. Profit must be after tax, after interest and after preference dividends. Minority interests, if any, are also taken out in group accounts. EPS lets you compare profit across companies of different sizes and over time.

The price-earnings (P/E) ratio is the share price divided by EPS. It tells you how many years of current earnings the market is paying for. A high P/E usually means the market expects growth, or sees the earnings as low-risk. It can also mean the share is overpriced, or that current earnings are temporarily depressed. A low P/E may signal weak growth prospects, high risk, or a bargain. A P/E has meaning only when compared with similar firms, the sector or the company's own history.

Dividend yield is the dividend per share divided by the share price. It is the cash return from dividends, before any capital gain. Dividend cover is EPS divided by dividend per share. It shows how many times the dividend could be paid from current profit. A cover below 1 means the company is paying out more than it earned that year. A high cover means the company retains much of its profit, which may fund growth or may mean the dividend is cautious.

Other measures include earnings yield (EPS ÷ price, the inverse of P/E), payout ratio (dividends ÷ earnings) and net asset value per share. Always say what the ratio suggests and what could distort it, such as one-off items, different accounting policies or a share price that has just moved.

Key rules to remember

Earnings per share (EPS): EPS = (Profit after tax and preference dividends) ÷ (Number of ordinary shares); Use the weighted average number of shares if shares were issued during the year. Take out preference dividends and minority interests first.
Price-earnings ratio: P/E = Market price per share ÷ EPS; Answer is in 'times' or years of earnings. Compare with sector or past values.
Earnings yield: Earnings yield = EPS ÷ Market price per share = 1 ÷ P/E; Often shown as a percentage.
Dividend per share: DPS = Ordinary dividends ÷ Number of ordinary shares; Use the dividend for the same year as the EPS.
Dividend yield: Dividend yield = DPS ÷ Market price per share × 100%; Gross of any tax paid by the investor.
Dividend cover: Dividend cover = EPS ÷ DPS = Earnings for ordinary shareholders ÷ Ordinary dividends; Expressed in times. Below 1 means dividends exceed earnings.
Payout ratio: Payout ratio = DPS ÷ EPS = 1 ÷ Dividend cover; Percentage of earnings paid out.
Net asset value per share: NAV per share = Net assets attributable to ordinary shareholders ÷ Number of ordinary shares; Compare with market price to judge market value against book value.

How to solve Investor Ratios and Market Measures questions

Use the same routine for any question on investor ratios. It keeps your working clear and protects method marks.

1Read what the question asks: calculate, interpret, compare or both. Note the year and the share price date.
2Find the earnings attributable to ordinary shareholders: profit after tax, less preference dividends, less minority interests if given.
3Find the number of ordinary shares. If shares changed during the year, use the weighted average for EPS and the stated number for dividend per share as the question directs.
4Write each formula in full, substitute the numbers, and state the units (₹ per share, times or %).
5Calculate the ratios in a sensible order: EPS, then P/E, DPS, dividend yield and dividend cover.
6Interpret each result in one or two sentences. Compare with the previous year, a competitor or the sector if data is given.
7State limitations or caveats: one-off items, different accounting policies, share price timing, and the fact that ratios are historic.
8Check the answer: P/E × earnings yield should equal 1, and payout ratio × dividend cover should equal 1.

Quickest way: EPS first, then everything else

When to use it: Use this in MCQs and short calculation parts, where time is tight and you need the number fast.

Compute EPS first. Almost every other ratio uses it.
P/E = price ÷ EPS. Earnings yield is the reciprocal, so you get both from one division.
Dividend cover = EPS ÷ DPS. Payout ratio is the reciprocal.
Dividend yield = DPS ÷ price. Do not use EPS here.
Sanity-check: if cover is 2, payout is 50%. If P/E is 20, earnings yield is 5%.

Common mistakes in Investor Ratios and Market Measures

Forgetting to deduct preference dividends from profit when calculating EPS.
Students start from profit after tax and stop there.
Fix: Always write 'earnings for ordinary shareholders' as a separate line: profit after tax less preference dividends (and minority interests if any).
Using total dividends instead of dividend per share, or dividing by the wrong share count.
Units get mixed when the question gives totals for some items and per-share values for others.
Fix: Convert everything to per-share or everything to totals before dividing. Check that numerator and denominator are in the same units.
Calculating dividend yield as DPS ÷ EPS.
Confusion with dividend cover and payout ratio, which both use EPS.
Fix: Yield compares the dividend with the market price. Cover and payout compare it with earnings.
Saying a high P/E always means a good company.
Students link 'high' with 'good'.
Fix: Say it reflects the market's expectations of growth and low risk, but may also mean overvaluation or temporarily low earnings. Compare with the sector.
Treating dividend cover below 1 as a certain sign of trouble, or high cover as always good.
Students apply a rule of thumb without context.
Fix: A cover below 1 means the dividend was paid partly from reserves that year. It may be temporary. High cover may mean retained profit for growth, or a cautious payout. Explain both sides.
Ignoring a change in the number of shares during the year.
Students use the year-end share count by default.
Fix: For EPS, use the weighted average number of shares when the question gives issue dates or bonus or rights issues, and state your assumption.

Worked examples

Example 1

A company has profit after tax of ₹12,00,000 and pays preference dividends of ₹2,00,000. It has 5,00,000 ordinary shares in issue throughout the year. Ordinary dividends paid are ₹3,00,000. The market price per share is ₹40. Calculate EPS, P/E, dividend per share, dividend yield and dividend cover.

Show the solution

Earnings for ordinary shareholders = ₹12,00,000 − ₹2,00,000 = ₹10,00,000.
EPS = ₹10,00,000 ÷ 5,00,000 = ₹2.00 per share.
P/E = ₹40 ÷ ₹2.00 = 20 times.
DPS = ₹3,00,000 ÷ 5,00,000 = ₹0.60 per share.
Dividend yield = ₹0.60 ÷ ₹40 = 0.015 = 1.5%.
Dividend cover = ₹2.00 ÷ ₹0.60 = 3.33 times (equivalently ₹10,00,000 ÷ ₹3,00,000).

Answer: EPS = ₹2.00; P/E = 20 times; DPS = ₹0.60; dividend yield = 1.5%; dividend cover = 3.33 times.

Example 2

Company X has EPS of ₹8 and DPS of ₹6, with a share price of ₹96. Company Y in the same sector has EPS of ₹5 and DPS of ₹1, with a share price of ₹100. Compare the two using P/E, dividend yield and dividend cover, and comment briefly.

Show the solution

Company X: P/E = 96 ÷ 8 = 12 times. Dividend yield = 6 ÷ 96 = 6.25%. Dividend cover = 8 ÷ 6 = 1.33 times.
Company Y: P/E = 100 ÷ 5 = 20 times. Dividend yield = 1 ÷ 100 = 1.0%. Dividend cover = 5 ÷ 1 = 5.0 times.
Comment on P/E: the market pays 20 years of earnings for Y but 12 for X. This suggests the market expects higher growth or lower risk from Y.
Comment on dividends: X pays out 75% of earnings, giving an income-oriented return but limited retention for growth. Y retains 80% of earnings, consistent with a growth strategy.
Caveat: the comparison uses one year's figures. One-off items, accounting policies and the date of the share prices could distort it.

Answer: X: P/E 12, yield 6.25%, cover 1.33. Y: P/E 20, yield 1.0%, cover 5.0. X suits income-seeking investors. Y looks like a growth share, and the market prices it accordingly.

Exam tips

Show every formula before substituting numbers. Method marks are given even if an arithmetic slip follows.
In MCQs, check which share count and which profit figure the question gives. The trap is often a preference dividend or a bonus issue.
For written parts, always add interpretation. A number with no comment rarely earns full marks.
Compare with something: previous year, sector or another company. A ratio alone has little meaning.
State caveats such as one-off items, accounting policy differences and the historic nature of the data. These are easy marks.

Practice questions from Interpreting company accounting information

Investor Ratios and Market Measures 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 and Market Measures: frequently asked questions

How do I calculate earnings per share and the P/E ratio?

EPS is profit after tax and preference dividends divided by the number of ordinary shares. P/E is the market price per share divided by EPS. For example, EPS of ₹5 and a price of ₹100 give a P/E of 20 times.

What does a high price-earnings ratio mean?

It means the market pays a lot for each rupee of current earnings. This often reflects expected growth or low perceived risk. It can also mean the share is overpriced or that current earnings are unusually low, so compare with the sector.

What is the difference between dividend yield and dividend cover?

Dividend yield is dividend per share divided by share price. It measures the cash return to the investor. Dividend cover is EPS divided by dividend per share. It measures how safely the company can pay the dividend from profit.

Is a dividend cover below 1 always bad?

No, but it needs explanation. It means the company paid out more than it earned that year, using reserves for the difference. That cannot continue indefinitely, so check whether the fall in earnings is temporary.

Which profit figure do I use for EPS?

Use profit attributable to ordinary shareholders. Start with profit after tax and deduct preference dividends and any minority interests. Use the weighted average number of ordinary shares when the share count changed during the year.