Question

Due Thursday

You are writing a book on how to evaluate performance evaluation for a company.

Respond to the following in a minimum of 175 words:

• Think about some of the influences and measures of company performance .
• Explain the use of return on assets (ROA) and the price-to-earnings (PE) ratio in evaluating the performance of a company.
• Write about how to calculate ROA and PE ratio and how market conditions can affect these metrics.
• Share the ROA and PE ratio for a company you are familiar with. What do these metrics tell you about the financial health of the company?

Answer 1

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. Return on assets is displayed as a percentage.

Businesses (at least the ones that survive) are ultimately about efficiency: squeezing the most out of limited resources. Comparing profits to revenue is a useful operational metric, but comparing them to the resources a company used to earn them cuts to the very feasibility of that company's’ existence. Return on assets (ROA) is the simplest of such corporate bang-for-the-buck measures.

ROA is calculated by dividing a company’s net income by total assets. As a formula, it would be expressed as:

Return on Assets = Net Income/Total Assets

Higher ROA indicates more asset efficiency.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

P/E Ratio Formula and Calculation

Analysts and investors review a company's P/E ratio when they determine if the share price accurately represents the projected earnings per share. The formula and calculation used for this process follow.

P/E Ratio=Market value per share​ / Earnings per share

To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS). The current stock price (P) can be gleaned by plugging a stock’s ticker symbol into any finance website, and although this concrete value reflects what investors must currently pay for a stock, the EPS is a slightly more nebulous figure.

EPS comes in two main varieties. The first is a metric listed in the fundamentals section of most finance sites; with the notation "P/E (TTM)," where “TTM” is a Wall Street acronym for “trailing 12 months.” This number signals the company's performance over the past 12 months. The second type of EPS is found in a company's earnings release, which often provides EPS guidance. This is the company's best-educated guess of what it expects to earn in the future.