Question

What are the key ratios that investors utilize to measure shareholder value and performance? Why? How does industry play a role in assessing those ratios?

Answer 1

The key ratios that investors use to measure shareholder value and performance are profitability ratios, valuation ratios and liquidity ratios.Profitability ratios that help investors to gain an understanding of share holder value are Return on Investment ,return on equity ,Return on Invested capital.Profitability ratios also include margin ratios like net profit gross profit and operating profit ratios.Profitability ratios give an indication of the firm's ability to generate profit with regard to revenue and assets .Return on investment ratio ROA =Net Income /average assets. The ratio indicates how the company is using it's assets to generate earnings.Return on equity ratio ROE =Net income /Average Equity.The ROE ratio shows net income as a percentage of shareholder equity .Return on Invested capital =Net operating profit after tax /total invested capital, it serves as an indicator of the firm's profit and value creation ability.The margin ratio express gross operating and net income as a percentage of sales.

The valuation ratios that investors use are Price earnings ratio ,Price to Book ratio an price to sales ratio..The valuation ratios help the investors to check whether the company's stocks are overvalued or undervalued.the Liquidity ratios used by investors to asses the company are current and quick ratios.These liquidity ratios will help investors develop an understanding of the financial strength of the firm.

The industry averages of the aforementioned ratios serve the purpose of comparison by acting as a bench mark.This comparison would enable potential investors to understand how a company is performing with regard to similar firms in the industry.this comparison would in turn provide them with the information that could be used in decision making purposes.