Investment ratios of McBride plc - Essay Example

According to David (2005), financial statements provide the potential users with a narrow insight into the strengths and weaknesses of a business. This is because what is reported does not give an in-depth depiction of performance of an entity. Such full view of a business is important as it would ultimately influence users’ decisions on whether to continue their association with an entity and in addition, give potential investors adequate information to aid them in decision-making. Thus, the concept of financial analysis The Mcbride Plc had basic normalized earnings per share of 2.9p, 12.3p, 9.2p, and 6.4p for the financial year of 2011, 2010, 2009 and 2008.

This ratio is very important in comparing the performance of companies, as this cannot be done using the profit they make directly because of differences in the number of outstanding shares and income. A higher Earnings per Share is desirable to investors as it indicates a higher relative income. This company has a EPS that fluctuates from time to time which means that shareholders returns is unstable. Price to earnings ratio (P/E ratio)- David (2003) states that price/earnings ratio is the most commonly used to evaluate investment in an entity.

He further points out that historically, the average P/E ratio for the broad market has been around 15, although it can fluctuate significantly depending on economic and market conditions. A stock with a high price/earnings ratio suggests that investors are expecting higher earnings growth in the future compared to the overall market while a stock with a low price/earnings ratio suggests that investors have more modest expectation for its future growth compared to the market as a whole (David, 2003).

From the computations of price/earnings ratio for McBride plc in table below, the ratio declined from 10.8 in 2010 to 9.44 in 2011. This decline may not be attractive to prospective growth investors despite