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What is a “value ratio”? How are these ratios calculated? What do they mean?

Value ratios, which are sometimes called market ratios, measure the stock market’s rating on a company by relating the market price of its shares to certain figures obtained from its financial statements. The reason for this calculation is that price alone does not say a great deal unless there is a common way of relating it to dividends and earnings. Value ratios do this.

Percentage dividend payout ratios indicate the amount or percentage of the company’s net earnings that are paid out to shareholders in the form of dividends. There are two kinds of payout ratios; namely, (a) on combined preferred and common dividends and (b) on common only. Note the different divisor in each case. Percentage of Available Earnings Paid Out as Preferred and Common Dividends Total dividends (preferred + common)/Net earnings (before extraordinary items) x 100 Percentage of Available Earnings Paid Out as Common Dividends Dividend on common/(Net earnings (before extraordinary items) – preferred dividend) x 100 The dividend payout ratio indicates the percentage of earnings being paid out as dividends. Deducting this figure from 100 gives the earnings percentage remaining in the business to finance future operations. An unstable payout ratio over the years usually means unstable earnings. Directors of some companies will try to maintain a steady dividend rate through good and poor times to preserve the credit rating and investment standing of the company’s securities. If dividends are greater than earnings for the year, the payout ratio will exceed 100%. Dividends will then be taken from retained earnings. This would erode shareholders’ equity. Other value ratios include earnings per share, dividend yield, price-earnings ratio, and equity value per preferred share.