Valuation Tools

Dividend Cover

A financial metric that measures the number of times that a company can pay dividends to its shareholders. The dividend cover ratio is the ratio of the company’s net income divided by the dividend paid to shareholders. 

Dividend payout ratio 

This is the fraction of net income a firm pays to its stockholders in dividends:

Dividend payout ratio = Dividends / Net Income for the same period

The part of earnings not paid to investors is left for investment to provide for future earnings growth. 

Passive income Investors seeking high current income and limited capital growth will prefer companies with a high dividend payout ratio. However, investors seeking capital growth may prefer a lower payout ratio because capital gains are taxed at a lower rate. 

Dividend yield 

Also known as the dividend–price ratio of a share is the dividend per share divided by the price per share. It is often expressed as a percentage.

Dividend yield is used to calculate the dividend earning on investments.

Yield traps are when a falling share price makes the last dividend ppayout appear as a higher %. So when dividend yields start rising to silly levles like 10% and above, you need to consider if the dividend will be cut.

Price–earnings ratio

Also abbreviated to P/E ratio, this is the ratio of a company's share price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.

As an example, if share A is trading at 400p and the most recent EPS is 40p, the PE ratio is 10.

My tip here is to compare this ratio against firms in a similar industry such as Tesco (17.72) and Sainsburys (27.92) and not two random industries. On the example here, Tesco has the lower PE ratio and would be deemed to be preferred choice.

Debt/Equity 

This is a financial metric that compares a company's total debt to its total equity, indicating the proportion of financing that comes from debt versus equity. A higher ratio signifies greater financial leverage and potentially higher risk, as it means the company relies more on borrowed funds.  

During periods of lower interest rates, it would have been normal to borrow on the cheap. Now that interest rates have returned to a more normal rate, servicing this debt has become harder.

Return on Equity 

(ROE) is a financial ratio that measures a company's profitability by calculating how efficiently it uses shareholder investments to generate profit. It's calculated by dividing net income by average shareholders' equity. 

A higher ROE generally indicates better financial performance and efficient use of capital.  

Price-to-Book Ratio

(P/B ratio is used to compare a firm's market capitalization to its book value and locate undervalued companies. This ratio is calculated by dividing the company's current stock price per share by its book value per share (BVPS).

• The market value of equity is typically higher than the book value of a company's stock.

• P/B ratios under 1.0 are typically considered solid investments by value investors.

RSI (Relative Strength Index)

An indicator I had not heard of until recently, so I'm still  deciding if I trust it, this is a technical indicator that looks on a 'short-term' basis if a stock is overbought or oversold.

It is a number between 0 and 100:

70 and over suggest the stock has been overbought.

30 and below indicate the stock has been oversold.

So, in theory, if a stock was to record 85, you would expect it to fall and if 25, you would expect it to rise.

I would expect there to be news on why values reach these levels ,such as a profit warning, or a possible merger, so further due diligence is recommended if you wish to trust these values.