Investor Ratio Definition
An investor ratio measures the ability of a business to earn an adequate return for the owners of the business. It is important to realize that the owners have money tied up in the business and need a return commensurate with the risk involved.
Popular Investor Ratios List
A selection of popular investor ratios from the Double Entry Bookkeeping Ratios Guide.
- Return on Equity – ROE
- Dupont Analysis
- Accounting Rate of Return
- Accounting Rate of Return Calculator
- Quality of Earnings Ratio
Investor Ratio Analysis
Investor ratios measure the return to the owner of the business and therefore tend to use net income (profits after tax) in any formula calculations. The ratios should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in your industry.
Additionally, in order to give a full picture of what is happening, they should be viewed relative to other ratios calculated for the business. Such ratios include liquidity ratios, efficiency ratios, leverage ratios, profitability ratios, and activity ratios.
Investor Ratios Formula
There are numerous examples of investor ratios. Consequently it is important to select the key ratios which relate to your business. The industry sector, size, and complexity of the business will determine the most appropriate ratios to use. It is important to realize that many ratios may not be relevant or worth calculating, particularly for a small business.
| Ratio | Formula |
|---|---|
| Return on Equity | Net Income / Average Equity |
| Dividend Cover | Net Income / Dividend |
Return on equity is the ratio of the net income of the business to the average equity during the period. Consequently the ratio gives an indication of how well the business rewards its investors for their investment. Additionally dividend cover is the ratio of net income to dividends for the period. The ratio is an indicator of how sustainable the dividend is.
It is important to note that an investor ratio should not be used as the sole criteria for an investor to make an investment decision. Other factors, such as the financial health of the business, market trends, and industry competition, should also be taken into account.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.