Market Test Ratios

The market test ratio relates the firm’s stock price to its earning and book value per share. These ratios are indicators of the performance of the company and also reflects the likely performance of the company in the near future. If the firm’s profitability, solvency and turnover ratios are good then the market test ratios will be high. The market test ratios are as follows:

(a) Divided Payout Ratio;

(b) Dividend Yield;

(c) Book Value.

(a) Dividend Payout Ratio:

Dividend per Share/Earnings per Share

Dividend payout ratio is the dividend per share divided by the earnings per share. Dividend payout ratio indicates the extent of the net profit distributed to the shareholders by way of dividend.A higher dividend payout ratio indicates that the company does not require further funds in the near future or it may also indicate that the cost of borrowing is less than the cost of equity. A low payout ratio is an indicator of the fact that company is in requirement of funds.

(b) Dividend Yield: (Dividend per share/Market price)× 100

This ratio reflects the percentage yield earned by investors by investing in company’s share at the current market price. This measure is especially useful for those investors who are interest in regular returns rather than capital appreciation.

(c) Book Value:

(Equity capital + Reserves − Profit loss A/C debit balance)/Total number of equity shares

This ratio indicates the net worth per equity share. Book Value is a function of the past earnings and distribution policy of the company.