Question

explain the significance and relevance of each term

business cycles

monetary policy

PEG ratio

price–earnings multiple

FIFO

return on equity

return on assets

Answer 1

Business cycles: The industries and companies have many business cycles like boom, recession and stable periods. Some business cycles are inherent character of business and some are the specific to the company and management.

Monetary policy: The objective of monetary policy is to help the economy reach or maintain monetary equilibrium. An economy is at monetary equilibrium when the quantity of money demanded equals the quantity of money supplied.

PEG ratio: PEG ratio is Price to earnings ratio to growth ratio (PEG). This ratio in an extension of price to earnings (P/E) ratio and helps us in better understand of earning potential of a stock. Growth in earnings is helps to determine whether a high or low P/E is justified. The formula for determining a PEG ratio is -

PEG Ratio = (price/earnings) / earnings growth rate

It’s calculated by dividing the P/E ratio by the company’s projected growth in earnings.

Price–earnings multiple: The price earnings ratio (PE Ratio) of a firm is calculated by current market price of its share divided by its earning per share (EPS).

Price to Earnings ratio (P/E) = Market Price of a Share / Earnings per Share

The P/E ratio is also known as price multiple and it indicates that how much of the amount an investor can expect in multiples of company’s earnings if investing in a company.

FIFO: FIFO means first-in, first-out. It is an accounting method of inventory management where the oldest inventory items are recorded as sold first.

Return on equity: Return on equity indicates that how much return is generated on the equity stockholders investment. The higher return is better.

Returns on equity = (Net Income/Stockholders Equity) * 100

Return on assets: Return on assets is a profitability ratio which indicates the firm earnings on its total assets.

Return on Asset (ROA) = Net income / Total Assets