Earnings per share
It is not a secret that most shareholders – if not all- want to invest in the companies that gain more profit or the ones that have the ability to do that in the future. So, it is only natural to say that the most known way to evaluate a company is to revise its profits. Earnings per share represent the shareholders share of the company’s net profit for every share they own if the company distributed its net profit as dividends. It is calculated by dividing the net profit of the company on the number of shares issued. For example, if we assume that the net profit of the company is 100 Million Riyals in one quarter and that it has 50 Million outstanding shares, then the earning per share is two riyals (100 million ÷ 50 million = 2).
Earnings per Shares = Company's Net Profit ÷ Number of Outstanding Shares
This percentage – if was adopted for several financial periods- measures the company’s improvement when compared to other competitors in the sector. If the company distributed all its net profits on investors, then there won’t be any enough money to cover its operational expenses or to develop its activities through it. The part where the company keeps its net profit and reinvests it is called retained earnings. The Board of Directors of the company often recommends, if the accumulation has large reserves of retained earnings, to distribute some profits to shareholders.
Understanding Accounting Ratios
It is a ratio of two selected numerical values. Some shareholders think that the complex financial accounting ratio (indicators) is only useful to those shareholders and financial analysts who have experience, but this is not true especially if we keep in mind the amount of the enterprises’ financial information that is currently available on the Internet and Tadawul website. Financial accounting ratios give the investor a quick and easy way to judge the company’s financial performance in a specific period of time. These ratios could also be used in comparison between companies’ performance in the same sector or compare it with the average of the companies’ performance in the market. Although many of these ratios or indicators are available to analaysts,yet most of them are expressed in either the form of percentage (%) or a multiple digit. Certainly, there are many figures that contribute to explain the company’s financial performance as well as the sector in which they operate in general. Thus, the part of the process used to determine the fair value of the stock is concentrated in the study of these figures and determine the most useful for measuring the performance of the company or the sector. The assessment of stocks or even making sure of its current fair value is somewhat difficult on the contrary of physical assets of the immovable property or tangible assets. For example, you can evaluate a fair selling price for a new car just by looking at it, but does a stock selling price reflect its real value? The answer to this question is a very complicated matter due to the variety of the affecting factors that cannot be fully measured or at least translated into numbers. For example, the levels of the company’s expected growth is listed in the asking price for its shares because companies that have strong future growth in profits exceed prices of those predicted to have modest growth. However, through our understanding of financial accounting ratios, we can pave the way for better governance on the company’s share price and whether the value is exaggerated or not. Since companies vary in their offered services according to the variety of sectors, then some financial ratios become more credible in describing the performance of one sector compared to the others. For example, the financial ratio could explain in detail the banking companies’ performance, where its use does not give the same result when dealing with agricultural companies.