Ratio analysis is a very powerful method of analyzing the status of a company by manipulating the audited financial statements. They are a yardstick of doing a performance evaluation of the firm’s financial condition. A deeper understanding of the ratios by an investor offers them more knowledge on the working of the firm and the best investment they can undertake. The financial ratio gives a relationship of two or more accounting variables through arithmetical expressions (Beck, 2009). They offer a standard for comparison of firms’ growth and performance as well as with competitors, more so, they offer the firm a clean bill of health.
Choice Company.
Kenya Commercial Bank. Audited financial statements for the period ending December 31st 2011.
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According to the audited financial data generated the bank’s return on assets is substantially low given the vast assets portfolio it boasts of holding. In general the company is not getting sufficient value for the vast asset investment it holds, thus it would be equally good if the company undertook a more robust utilization of the assets at its disposal. The bank is open to measures such as; expanding the customer base and enhancing the credit book as well as diversifying its portfolio holdings. Thus, the management should take a better and more strategic choice in the overall allocation of the firm assets/capital to generate more revenue. In relation to other leading competitors in the Kenyan bank industry the company is quite performing despite the low …show more content…
However, it is not sufficient enough for a rational investor to commit his funds basing on its reliability and strength.
Dividend Yield.
10.98
This is a ratio that outlines how much the dividend payout relates to the firm’s share price. In markets like Kenya where capital gains tax has not been in operation the dividend yield is generally similar to the returns on investments of a firm’s stock.
The current KCB dividend yield is substantial enough to lure any investor to obtain a chunk of their stock. Based on their current market strength and position the bank’s dividend yield is quite stable thus any potential shareholder who wants to enhance and complement their income levels can obtain the firms shares.
Payout ratio.
50.02
This is a distribution of the company’s earnings that are distributed to stockholders as dividends. This metric helps to establish the long term sustainability of the firm’s dividend payment or distribution. Any payout ratio that is less than 100% is a better indicator of the firm’s performance and is more attractive to an
The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.
The dividend payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. This is well evident with Pepsi Co’s dividend payout ratio of 45.95% as compared to Coca-Cola’s 20.11%. A low dividend payout is always better as it leaves more room for the company to increase dividend payouts in the future while a high ratio means there is less room.
Dividend per share ratio is the sum of all dividends a company pays out over a fiscal year divided by the number of outstanding shares. It is used to share the profit of the company with shareholders. If this share decreases, it needs reinvestment in the operation, debt reduction and poor earnings of the company. In this case, there was an increase in the year of 2015 in J.B Hunt. It is used to share a company's profits with its shareholders. The reason for decreasing the value in dividend per share refers to reinvestment in the operation of a company, poor earnings, and debt reduction.
In order to understand the dividend policies of a company the dividend payout ratio and the dividend yield ratio are identified. Investors focus on the stock price and the dividends to decide whether to cash in on a stock. At the same time, the performance of a stock when compared to the overall industry performance is necessary when buying and purchasing stocks. Investors receive dividends regularly, based on the declared dividends that are mostly affected by the earnings.
Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.
Dividend Yield: measures cash return per common share by dividing annual cash dividends per share by market price per share.
These ratios are the most closely viewed by creditors, investors and management (Cornett, Adair & Nofsinger, 2009). The dividend payout ratio is the amount paid to stockholders and the retained earnings ratio is the opposite (Sustainable Personal Finance, 2011). It is the amount that must be held back in order to make the payout.
What is the cash dividend yield on the Common Stock? (provide formula, data inputs and product.)
The dividend yield advises an investor the yield he/she can look forward to if he/she purchases stock from the company. To calculate the dividend yield, divide the annual dividend per share by the market price per share. Chuck E Cheese’s did not have the figures written in its annual report to perform calculations.
Dividends per share: are equal to the amount of net income distributed to shareholders divided by the number of shares outstanding.
The paper illustrates that financial ratio analysis is an important tool for firm’s to evaluate their financial health in order to identify areas of weakness so as to institute corrective measures.
First, current payout policies directly increase payout ratio by issuing large amount of new shares. High payout ratio shows that the company has to spare a large amount of cash to pay dividends rather than invest in more profitable projects.
The calculation of ratios is the calculation technique for analyzing a company’s financial performance that divides or standardize one accounting measure by another economically relevant measure. Financial ratios can be used as a tool to demonstrate financial statement users for making valid comparisons of firm operating performance, over time for the same firm and between comparable companies. External investors are mostly interested in gaining insights about a firm’s profitability, asset management, liquidity, and solvency.
Firms and Companies include ‘Ratios’ in their external report to which it can be referred as ‘highlights’. Only with the help of ratios the financial statements are meaningful. It is therefore, not surprising that ratio analysis feature are prominently in the literature on financial management. According to Mcleary (1992) ratio means “an expression of a relationship between any two figures or groups of figures in the financial statements of an undertaking”.
The payout ratio is set at .30 from 2006 onwards. Notice that the long-term growth rate, which settles in between 2011 and 2012, is ROE × ( 1 – dividend payout ratio ) = .10 × (1 - .30) = .07.