ABDULLAH QAYYUM

ASSIGNMENT NO # 3

L1F17BSAF0060

SUBMITTED TO: SIR ABID NOOR

 What is Shareholder’s Equity?

Shareholders equity is the difference between total assets and total liabilities. It is also
the Share capital retained in the company in addition to the retained earnings minus the
treasury shares. Shareholders equity is the amount that shows how the company has
been financed with the help of common shares and preferred shares. Shareholders
equity is also called Share Capital, Stockholder’s Equity or Net worth.

Importance of Shareholder’s Equity:

Shareholder’s equity is an important metric for investors. It forms part of ROE
ratio, which shows how well a company’s management is using its equity from
investors to generate profit.
Analyzing owners’ equity is an important analytics tool. Analyzing and tracking a
firm’s growth in book value over time is a valuable exercise, this investigates how
well (or badly) a firm is managing the capital that shareholders have invested in the
company.
Formula and Calculation of Shareholder Equity:

Shareholders’ equity=total assets−total liabilities

This formula above is also known as Accounting Equation or Balance Sheet.

Shareholder equity can be either negative or positive. If positive, the company has
enough assets to cover its liabilities. If negative, the company's liabilities exceed its
assets; if prolonged, this is considered balance sheet insolvency.
 Ratios

Earnings per Share (EPS):

Earnings per share (EPS) are calculated as a company's profit divided by the
outstanding shares of its common stock. The resulting number serves as an
indicator of a company's profitability. The higher a company's EPS, the more
profitable it is considered.

Formula:

To calculate a company's EPS, the balance sheet and income statement are used
to find the period-end number of common shares, dividends paid on preferred
stock (if any), and the net income or earnings. It is more accurate to use a
weighted average number of common shares over the reporting term because
the number of shares can change over time
 Example

Dividend Payout Ratio:

The dividend payout ratio is the ratio of the total amount of dividends paid out to
shareholders relative to the net income of the company. It is the percentage of
earnings paid to shareholders in dividends. The amount that is not paid to
shareholders is retained by the company to pay off debt or to reinvest in core
operations. It is sometimes simply referred to as the 'payout ratio.'

Formula
 Example
Joe’s Kitchen is a restaurant change that has several shareholders. Joe reported
$10,000 of net income on his income statement for the year. Joe’s issued $3,000 of
dividends to its shareholders during the year. Here is Joe’s dividend payout ratio
calculation.

As you can see, Joe is paying out 30 percent of his net income to his shareholders.
Depending on Joe’s debt levels and operating expenses, this could be a sustainable
rate since the earnings appear to support a 30 percent ratio.

Retention Ratio:

The retention ratio is the proportion of earnings kept back in the business as retained earnings.
The retention ratio refers to the percentage of net income that is retained to grow the business,
rather than being paid out as dividends. The retention ratio is also called the plowback ratio.

Formula
 Example

Dividend Coverage Ratio:

The Dividend Coverage Ratio, also known as dividend cover, is a financial metric that measures
the number of times that a company can pay dividends to its shareholders. The dividend
coverage ratio is the ratio of the company’s net income divided by the dividend paid to
shareholders.

Formula & Example

 Dividend Yield Ratio:

The Dividend Yield is a financial ratio that measures the annual value of
dividends received relative to the market value per share of a security. In other
words, the dividend yield formula calculates the percentage of a company’s market
price of a share that is paid to shareholders in the form of dividends.

Formula:
 Example

Price Earnings Ratio:

The Price Earnings Ratio (P/E Ratio) is the relationship between a company’s
stock price and earnings per share (EPS). It is a popular ratio that gives investors a
better sense of the value of the company. The P/E ratio shows the expectations of
the market and is the price you must pay per unit of current earnings (or future
earnings, as the case may be).
Formula:

Example
 Earnings Yield Ratio:

The earnings yield is a financial ratio that describes the relationship of a company’s Last Twelve
Months earnings per share to the company’s stock price per share. The earnings yield is the
inverse ratio to the quick formula for Earnings Yield is E/P, earnings divided by price. The yield
is a good ROI metric and can be used to measure a stocks rate of return.

Formula

Example
 Book Value per Share (BVPS):

The book value per share (BVPS) is calculated by taking the ratio of equity
available to common stockholders against the number of shares outstanding. When
compared to the current market value per share, the book value per share can
provide information on how a company’s stock is valued. If the value of BVPS
exceeds the market value per share, the company’s stock is deemed undervalued.
The book value is used as an indicator of the value of a company’s stock, and it
can be used to predict the possible market price of a share at a given time in the
future.

Formula
 Example

Price-to-book ratio:

The price-to-book ratio compares a company's market value to its book value. The market value
of a company is its share price multiplied by the number of outstanding shares. The book value is
the net assets of a company. Book value is also the net asset value of a company calculated as
total assets minus intangible assets (patents, goodwill) and liabilities. For the initial outlay of an
investment, book value may be net or gross of expenses, such as trading costs, sales taxes, and
service charges

Formula
 Example

Price-to-book ratio:

Price-to-book ratio:

Price-to-book ratio: