This illustrated glossary uses Visual Finance™ to provide a contextualized 'big picture' view of financial results. The examples feature data for the Round Number Company—a 'made-up company' with simplified figures. The Appendix presents an explanation of how to read Visual Finance as well as the financial statements and VF views for the Round Number Company.
At the end of the reporting period, the company can distribute some of the profit to the Shareholders as a Dividend. The remaining profit is added to Retained Earnings to fund growth.
Dividend Cover ratio: Net Income divided by Dividends
Example: The Round Number CompanyThe Round Number Company made a profit of 30, and the entire amount was added to Retained Earnings. If instead the owners declare a Dividend of 10, then the Net Income is still 30, but the Addition To Retained Earnings is only 20. (Payment of the Dividend would reduce Cash by 10, so the Balance Sheet will still balance.) Dividend Cover = 30/10 = 3 |
If the Dividend Cover is greater than 1, it means the business has reinvested some profit back into itself – the higher the number the greater the re-investment. Generally, a dividend cover of 2 or more is considered a safe coverage - it allows the company to safely pay out dividends and still allow for reinvestment or the possibility of a downturn.
Some companies occasionally pay Dividends greater than their Earnings; this may happen if they take a temporary loss and want to send a signal that the loss does not matter. Failing to pay an expected dividend signals that the company has run into unexpected difficulty, and this may hurt the price of shares. It shrinks the size of the business to pay a dividend greater than earnings, but a high stock price is important if the company wants to raise more capital by issuing shares. The company wants the most money for the fewest new shares issued.
The above is our generic explanations of common corporate financial terminology. Actual meanings can vary widely from company to company; in order to have the correct internal definition you need to ask your Finance Department, "What do you mean by that?"
term list.