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Summary of chapter 28 : Equity
 
  Share analysis is centred on changes in stock market prices, multiples (especially P/E), dividends and returns, compared with required returns.
Dividends are analysed by looking at returns (dividend on the share price) and the payout ratio (dividend on net profit).
The P/E (Price Earnings Ratio) is the ratio of the value of the share to EPS (Earnings Per Share). Changes in P/E follow future EPS growth and move in the opposite direction from interest rates and risk (financial and operational).
It is only when the company pays out all of its profits and when financial and industrial markets are in equilibrium, that inverse P/E (also called earnings yield) is equal to shareholders’ required rate of return. Generally, the inverse P/E criteria results in an under-estimation of shareholders’ required rate of return.
We’ll be looking at P/E, which is more of a valuation instrument than an instrument used in financial policy, in greater detail in the following chapters.

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