The current share price for Next Plc at close of business on 8th November is 27. 46 (Shareprices. com, 2011). The share price for any share in any company fluctuates on a daily, even hourly, basis due to supply and demand. The share price is for one share in Next Plc. This is what an investor would pay for per share if he/she were to purchase shares at the point the information was downloaded together with broker fees. Share price is important for two reasons, if too high it may prevent individuals from being able to purchase enough shares to make up a round lot (100 shares) which is what some brokers require at the outset.
Also, there is a general rule that shares below 1 (referred to as penny shares) are deemed to be speculative in that trying to predict whether high gains will be made is risky. i) Price Earnings (P/E Ratio) The price earnings ratio divides the market share price by the EPS figure.
Next Plc’s P/E Ratio is 12. 37 times meaning that shareholders are prepared to pay 12. 37 times 2. 21 which is what each share is earning. In general, the higher the P/E Ratio of a company, the higher the level of market confidence.
It is usually more helpful to compare the P/E Ratios of one company to other companies in the same sector in order to gauge the level of confidence. The International Accounting Standards Committee provides standards that state how particular types of transactions and other events should be reflected in financial statements.
The IASC has no authority to require compliance with its accounting standards. However, many countries require that financial statements of companies who publicly trade should be prepared in accordance with IAS.
The EPS figure used within the P/E Ratio is one such figure that is included, being covered by the IAS 33. The IAS 33 sets out the way in which the EPS figure should be calculated in the following way:- Net income – Dividends on Preferred Stock Average Outstanding Shares EPS is reported over a certain period of time and the number of outstanding shares will likely fluctuate in that period, this is why average is used rather than a particular number (Collings, 2011). EPS is considered by most investors to be the single most important metric to use when evaluating a stock.
However, some aspects of EPS can be misleading when comparing two different companies. For example, one company could use twice as much capital to generate the same amount of profit as another, but it is obviously not utilizing its capital as efficiently as the other company. However, these numbers are not reflected in the EPS, so it is important to do your research on many different metrics when evaluating a company. The IAS 33 states that an organisation must disclose the EPS figures in the Statement of Comprehensive Income (as with Next Plc).
However, if a separate profit and loss statement is presented then the EPS figures should be presented on there. ii) Dividend Yield Dividend Yield expresses the dividend being paid as a percentage of the current share price. The Dividend Yield for Next Plc is 2. 84%. Dividend yield is an easy way to compare the relative attractiveness of various dividend-paying stocks. It tells an investor the yield he/she can expect by purchasing a stock. This allows a basis of comparison between other investments such as bonds, certificates of deposit, etc. It is a measure of the return on investment that the shareholder is receiving.
Many yields are around 3%. ) Market Capitalisation Market capitalisation (market cap) is the total value of the shares of a company’s sector or market. As can be seen in Note 8 to the Consolidated Financial Statements (app. 6) Next Plc has 185mn shares in issue. If we times the total of shares in issue by the share price as at 8th November ( 27. 46) this provides us with the market capitalisation for Next Plc – 5. 80bn. An investor would use this figure to determine the size of Next Plc as opposed to sales or total asset figures (Vetilingham, 2009).
The market capitalisation of companies can be divided up into three categories; high cap, mid cap and low cap and generally speaking, if a company was listed on the FTSE 100 it would be regarded as high cap. Next Plc is listed on the FTSE 100 and therefore could be legitimately viewed as having high market capitalisation. Part E – Growth & Return i) Capital Growth Essentially, investors buy shares because they expect the share price to go up and/or because the shares will earn them income in the form of dividends.
The increase in share price over time is known as capital growth whilst the decrease in share price over a period of time is called capital loss. For example, with Next Plc, investors may have purchased shares in early October for 25. 58 and a year later they may be worth 30. 58. If the shares were then sold, gains would be realised by the difference of 5 being pocketed. This is called a capital gain (Vaitilingham, 2009). Until the shares have actually been sold then any capital gain is on paper only and, once sold, the capital gain must be recorded in an Annual Tax Return. ) Income Return
Some investors may be seeking long term income in the form of dividends which are payments made to shareholders out of an organisation’s profits. Not all companies pay dividends as some choose to use profits for organic growth. Those organisations that do pay dividends may have a policy of paying out a certain percentage of profits to shareholders. These dividends are usually paid twice a year; an interim dividend halfway through the year and a final dividend at the end of the year (Vaitilingham, 2009). Together these dividends form the total dividend which again must be included in an Annual Tax Return.
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