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In this article we look at two more valuation measures. Dividend yield A dividend yield is the percentage of a company's share price that it pays out as dividends over the course of a year. It is calculated as dividend per share divided by the current share price. Using our example of EPIC once more, it has a share price of 300p and pays out dividends of 6p per share. Its dividend yield is therefore 2% (6p/300p). Most profitable companies in the UK pay regular dividends to their shareholders. Some pay more than others, depending on their growth prospects, cash balances and dividend policy. Newer companies still looking to expand will tend to pay low dividends. Mature companies with less room to expand will tend to pay higher dividends. You will find the majority of companies will try to increase their dividends each year, usually in line with any profit increase. However, they are often reluctant to cut their dividends if their profits fall. Therefore, if you have a broad portfolio of shares you are likely to find that the annual dividend income you receive is a lot less volatile than the total value of your holdings. Like other valuation measures, you can either look at the historical figures (either the latest completed financial year or the last 12 months) or forecast figures. A high dividend yield may indicate that the share is cheap. But, as ever, caution is required. Most yields that are quoted are historical and it does not mean that the same level of dividends will be paid in future. Whilst brokers may be able to predict forecast increases, it is a lot harder to predict cuts. If a company hits really bad times, it may suspend its dividend payments altogether. If a company's share price falls dramatically, because investors realise it is struggling, this can increase the historical yield, perhaps even into double figures. Treat all such companies with extreme care as this often means that investors, as a whole, do not believe that the past level of dividend payments will be maintained. As a rough rule of thumb, any share that has a yield of more than double the market average (being 3% at the time of writing) should be treated with extra caution. Price to book The price to book ratio compares the value of a company's assets to its market value. It is calculated as market value divided by net assets. EPIC has a market value of £30m and assets of £10m. So its price to book value would be 3 (£30m/£10m). Some investors look for a price to book ratio of less than 1 on the basis that if a company's market value is less than it could raise by selling all its assets it must offer good value. There are three main complications to consider with the price to book ratio. Firstly, there is the make up of the assets figure you use. Most people take out what are known as intangible assets, such as goodwill. They only include real or tangible assets such as property, equipment and stock. Secondly, the valuation of the assets can be inaccurate. For example, a company's property could be based on original cost from ten or twenty years ago, meaning that its value in its balance sheet is far too low. Likewise, if you were to shut down an operation and sell off a business, there could be additional closure costs that are not represented on a balance sheet. Lastly, many companies these days have little in the way of assets as they are 'people businesses'. Their price to book ratios can be very high and it is usually fairly meaningless to compare this ratio to other companies. Other valuation measures: P/E & PEG ratio | Price to Sales
