Introduction
Investment analysis lies at the core of both individual wealth management and corporate finance. Whether the objective is to protect capital, identify profitable opportunities, or evaluate organizational stability, investors and stakeholders require systematic tools to assess financial health. One of the most widely used approaches is fundamental analysis, which examines the intrinsic value of a business by interrogating financial statements, operational performance, competitive advantage, and macroeconomic conditions (Penman, 2021). Unlike technical analysis, which primarily focuses on price movements and market psychology, fundamental analysis provides a structured examination of profitability, risk, and long-term sustainability.
At the centre of this framework are financial ratios, which translate complex data into interpretable measures of financial health. Ratios condense volumes of accounting information into standardized metrics that can be compared across time, sectors, and economies (Atrill & McLaney, 2019). They serve as the foundation of decision-making for investors, creditors, regulators, and managers. In volatile and inflation-prone markets such as Zimbabwe, their relevance becomes even more critical, as ratios simplify fluctuating figures into meaningful patterns (Mhlanga, 2020).
This essay discusses five major ratios that are indispensable for assessing organizational financial health:
- Earnings per Share (EPS)
b) Interest Cover Ratio
c) Dividend Payout Ratio
d) Capital Gearing Ratio
e) Dividend Cover
Each ratio is defined, its formula explained, and its interpretation illustrated with practical examples, including cases from emerging markets. The essay also highlights their limitations, relevance in the Zimbabwean context, and insights from recent research (2018–2023). A comparative discussion integrates the ratios into a holistic framework, followed by an expansion into qualitative dimensions of fundamental analysis, ensuring a comprehensive understanding of how ratios contribute to financial decision-making.
1. Earnings per Share (EPS)
Definition and Formula
Earnings per Share (EPS) is a fundamental measure of profitability per unit of ownership. It reflects the portion of a company’s net earnings attributable to each outstanding share of ordinary stock (Gibson, 2020). The formula is:
EPS = Net Income ÷ Number of Ordinary Shares
2. Interest Cover Ratio
Definition and Formula
The Interest Cover Ratio, also known as the Times Interest Earned (TIE) ratio, measures a firm’s ability to meet interest obligations using its earnings before interest and taxes (EBIT).
Interest Cover = EBIT ÷ Interest Expense
3. Dividend Payout Ratio
Definition and Formula
The Dividend Payout Ratio expresses the proportion of net income distributed as dividends:
Dividend Payout Ratio = (Dividends ÷ Net Income) × 100
4. Capital Gearing Ratio
Definition and Formula
The Capital Gearing Ratio measures the proportion of financing from fixed-interest-bearing funds relative to equity:
5. Dividend Cover
Definition and Formula
Dividend Cover assesses the sustainability of dividend payments:
Dividend Cover = Earnings ÷ Dividends
6. Comparative Discussion of Ratios
When integrated, these ratios provide a multi-dimensional view of financial health. EPS highlights profitability, interest cover assesses debt-servicing ability, gearing reveals leverage, and dividend metrics reflect shareholder value distribution and sustainability.
• Profitability vs. Solvency: EPS may look strong, but if interest cover is weak, profits may not be sustainable.
• Risk vs. Reward: High gearing boosts EPS through leverage but weakens interest cover, increasing financial risk.
• Dividends and Sustainability: Payout ratio and dividend cover must be analysed together to assess whether shareholder rewards are sustainable.
However, ratios are limited by historical focus, accounting policies, lack of context, and exclusion of qualitative factors such as governance and ESG performance (OECD, 2021).
7. Beyond Ratios: Broader Fundamental Analysis
Modern fundamental analysis extends beyond financial ratios to include:
• Macroeconomic conditions (inflation, exchange rates, interest rates).
• Industry structure and competition
.
• Corporate governance and transparency.
• ESG performance (environmental, social, governance).
These factors contextualise ratio analysis, ensuring investors capture both financial and non-financial determinants of performance (Khan, 2022).
Conclusion
Fundamental analysis remains indispensable in assessing financial health, with key ratios such as EPS, interest cover, dividend payout, gearing, and dividend cover forming the backbone of this evaluation. Each ratio provides unique insights, but their true power lies in integrated interpretation. While EPS captures profitability, solvency ratios reveal risk, and dividend metrics assess value distribution and sustainability.
In Zimbabwe and other emerging markets, ratios must be interpreted with caution due to inflation, currency instability, and limited capital markets. Recent research (2018–2023) underscores the need to combine ratio analysis with cash flow measures, governance assessments, and macroeconomic context for a holistic view.
Ultimately, ratios provide clarity, but they must be embedded in a broader framework of fundamental analysis to guide sound investment decisions.
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