You are a research analyst for a publicly traded company, and you’ve been assigned to give...

You are a research analyst for a publicly traded company, and you’ve been assigned to give a presentation on how a company uses performance metrics in corporate valuation.

Think about how you would present return on equity (ROE) and earnings per share (EPS) to a group of investors or senior management.

Explain the use of ROE and EPS in evaluating the value of a company. Include how to calculate ROE and EPS.

Why is understanding ROE and EPS important to a company’s value?

Share an example of a company whose ROE and EPS you calculated. What do these results say about the company?

Solutions

Expert Solution

Return on Equity and Earning per share will be presented to the investors as prime consideration about the investment into the company as return on equity will be reflecting the overall return which is generated by the company on investment and return on equity and Earning per share will be used for evaluation of the company to the largest possible extent because return on equity along with Earning per share is used for calculation of various price to earning multiples and related valuation multiples which will be helpful for the investor's in deciding between whether to invest into the company or whether not to invest into the company.

Understanding of return on equity and Earning per share is important to the valuation of the company because it will be helpful in determination of the price to earning ratio and price to earning and growth ratio along with other ratio which are based upon the profitability of the company and which are prime consideration for the investor in investing into the company because various investments are also looking for dividend payment so these are also including the overall rate of return on investment which are generated by the company and hence these will only include the return for the shareholders so, this will be considered in related valuation in respect to other companies and market price.

For example, I have calculated the return on equity of Apple of around 20% and Earning per share of the Apple is $5 after it has been splitted, and it is also helpful for me in determination of price to earnings ratio and when I am deciding about whether to invest or not invest after ascertainment of the price to earnings ratio.

jeff jeffy answered 1 year ago

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