COMMENTING

STEP 1: Name the Financial Indicator e.g. Current Ratio

STEP 2: State the trend (increased / decreased) and the figures

either: both years e.g. increased from 2.1 : 1 to 2.8 : 1
or quote the difference between the 2 years
e.g. increased by 0.7 : 1

STEP 3: Give a comment

TASK 4.15 Lowveld Ltd:

Returns, Earnings & Dividends
SHAREHOLDERS RETURNS (Pg 202)

Are the shareholders earning good returns on the capital that they have
invested?

Net profit after tax x 100

Ave shareholders equity 1
(OSC + RI)

Return should be compared to previous year.

For example ROSHE increased from 20.5 % to 25.2 % or increased by 5.3 %.

Return should be compared to an alternative investment for example a fixed

deposit.
For example – The shareholders should be satisfied with the return as it is
higher than the interest rate payable on an alternative investment e.g. a fixed
deposit where ± 9 % can be earned.

4.15. Calculate the Return on shareholders’ equity for 2012. Calculate to one decimal place.
1
715 500 x 100
½[2 330 000 + 1 474 500] 1
715 500 x 100
1 902 250 1
37.6%
EARNING PER SHARE

EPS indicates how much money a company makes for each share.

A portion, or all earnings may be retained by the company for future expansion
and shareholders might not receive a dividend pay-out.

Net income after tax x 100

Number of issued shares 1

4.15. Calculate the Earnings per share. Always quote the answer in cents per
2 share.
715 500 x 100c
2 500 000
28.6 cents per share

DIVIDENDS PER SHARE

DPS calculates the portion of a company's earnings that is paid out to

shareholders.

Dividends for the year x 100

Number of issued shares 1

4.15. Calculate the Dividends per share. Always quote the answer in cents per
3 share.
350 000 x 100c
2 500 000
14 cents per share

EPS and DPS are used in various ways to assess the performance of the
company.

DPS can be compared to the EPS in order to assess the amount retained by the
company.
EPS – DPS = RETAINED INCOME PER SHARE
e.g. 28.6 c – 14 c = 14.6 c/28.6c x 100 = 51%

OR to assess the DIVIDEND PAY-OUT RATE.

Dividends per share x 100

Earnings per share 1

e.g. 14/28.6 x 100 = 49%

 Comment briefly on your findings above.
The shareholders should be very satisfied as the ROSHE of 37.6 % is greater than an
alternative investment e.g. fixed deposit where ± 9 % can be earned.

Shareholders should be pleased with the dividend of 14 cents per share. A return of 23 %
is earned per share.
(R1 520 000/2 500 000 = 60.8 cents per share. 14 c/60.8 c x 100 = 23 %)

EPS = 28.6 c and DPS = 14 c Therefore the company is retaining (14.6 /28.6 x 100)
51 % of its earnings for expansion which should result in higher profits in the future.
The retained income also increases the value of the shares which could benefit the
shareholder when selling their shares on the JSE at a higher price.
TASK 4.16 Wembley Ltd: Returns, Earnings & Dividends
4.16. Calculate the following:
1
(a) Return on shareholder’s equity
150 000 x 100
½[4 510 000 + 3 450 000] 1
150 000 x 100
3 980 000 1
3.8%

(b) Earnings per share

150 000 x 100c = 7.5 cents per share
2 000 000

(c) Dividends per share

140 000 x 100c = 7 cents per share
2 000 000

4.16. Comment briefly on your findings above.

2
ROSHE – decreased /dropped from 10 % to 3.8 %.
The shareholders should not be satisfied as the ROSHE does not compare favourable to an
alternative investment e.g. fixed deposit where ± 9 % can be earned.

EPS decreased significantly from 20 cents to 7.5 cents per share

The shareholders should not be happy with the performance of the company as the EPS
indicates that net profit for the year decreased from last year, also the issue of share
capital (R1 050 000) has not helped to increase earnings but rather led to a drastic
decrease.
DPS decreased from 10c to 7c per share
The company has paid out almost all its earnings EPS 7.5 c  DPS 7 cents per share.
The dividend pay-out rate is (7/7.5 x 100) 93 %. This was done probably to maintain the
share price on the JSE and maintain shareholders confidence in the company.
TASK 4.18  Tower Ltd: Net asset value
NET ASSET VALUE (NAV)

The Net Asset Value (NAV) per share gives an indication of the actual (intrinsic)
value of the share according to the company’s books.

Shareholders' equity x 100

Number of issued shares 1

Compare the NAV of shares to the market price (JSE price) of shares.

If the market price of shares is higher than the NAV of a share, it will be
profitable for a shareholder to sell his shares.

New shares should be issued at a price higher than the NAV and market price
as the new shareholders must pay more / “premium”, as they did not take the
initial risk.

4.18. Calculate the number of new shares issued on 1 July 20.4 and the issue
1 price of those shares.
3 800 000 – 2 200 000 = 1 600 000 shares

1 200 000 ÷ 1 600 000 shares = 75 cents per share

4.18. Calculate the Net asset value per share for both years.
2 Always quote the answer in cents per share.
2015: 3 000 000 x 100c = 78.9 cents
3 800 000
2014: 1 400 000 x 100c = 63.6 cents
2 200 000

4.18. Comment on your findings above.

3
NAV increased from 63.6c to 78.9 c OR by 15.3 cents but is lower than the market
price of 85 cents.

4.18. Would you purchase shares in this company at 85 cents? Explain.

4
No, the NAV is lower than the market price of 85 cents per share, therefore the shares are
overvalue on the JSE.

Yes, as the market price is higher than the NAV which reflects a high public demand for
the shares.
Shareholders will be willing to pay more for shares than NAV, as NAV does not take into
account future earnings potential of a company and certain values in the Statement of
Financial Position are undervalued for example Land and Buildings is valued on the basis of
the Historical Cost concept and could be unrealistic.
TASK 4.19  Finsbury Ltd: Net asset value

4.19. Calculate the number of new shares issued on 1 September 2021 and
1 the issue price of those shares.
2 200 000 – 1 700 000 = 500 000 shares

1 600 000 ÷ 500 000 shares = 320 cents

4.19. Calculate the Net asset value per share for both years.
2
2022:6 070 000 x 100c = 275.9 cents
2 200 000

2021:4 310 000 x 100c = 253.5 cents

1 700 000

4.19. Comment on your findings above.

3
NAV has increased from 253.5 cents to 275.9 cents OR by 22.4 cents. The new
shares were issued at 320 cents per share which is 66.5 cents above the NAV at the
beginning of 2022.

4.19. A friend offers you 225 cents per share. Would you sell your shares at
4 this price? Explain.
No – according to NAV the shares are worth more than R2.25.
SOFP figures are conservative as fixed assets are valued at the historical cost and the
SOFP figures do not take into consideration future earnings of the company and goodwill.
A company’s share price on the JSE should be higher than the NAV.