There are many ratios that investors and financial advisers use to compare and value shares.
The more common ratios are as follows:
Dividend yield – dividend per share divided by the current share price (this is usually compared to yields from property, fixed interest and cash).
Earnings yield – company earnings per share divided by share price. Companies may not pay out all of their profits as dividends.
Price to earnings ratio (P/E ratio) – price of the share divided by the earnings per share. The number you calculate is the number of years it will take to recover the price you’ve paid for the share. It assumes dividends continue to be paid at the same rate. This ratio is used to determine the valuation of the share. A higher P/E ratio potentially results in a longer time to get your capital back in earnings and hence we view it as more expensive than one with a lower P/E. Advisers and economists often use this ratio to compare shares in similar industries and share markets across the globe.