Question

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.

Respond to the following in a minimum of 175 words:

• 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?

Answer 1

Performance metrics in company's evaluation:

To begin with , I would present the rise in return on equity and Earning per share. Return on equity(ROE) basically measures the returns and its efficiencies on an investment done by an individual or a firm.

Next, we would be comparing ROE with cost of capital mail for the use in calculation of earning per share (EPS).

USE OF ROE:

It is a measure to evaluate the company on the metric of how efficient a company is iin hadlling the money of hat is contributed by the shareholders. Ii is a tool to find the investment profitability in relation with the shareholder's equity.

CALULATION:

ROI = NET INCOME / SHAREHOLDER'S EQUITY

For example:

	BOUGHT	SOLD
	$1200 for 10 shares	$1400 for 10 shares

A person bought 10 shares of Electracompany at 1200 and sold all of it at 1400 , the total return will be $200

return on investment = 200/1200 = 16.66%

With this result , he could formulate his portfolio or other investments strategies.

USE OF EPS:

EPS shows the earnings of a company on each stock of its stock. It is one of the most important metrics used by the companies to evaluate their share pricing.

It can be calculated as,

Earning per share = Net income - preferred dividend / common shares outstanding (End of period)

As the number of shares can change over the time because of corporate actions like stock splits and reverse stock split, it is better to use weighted average number of common shares.

For example,

Electra company has a net income of $1 million in the third quarter. The company announces dividends of $150,000. Total shares outstanding is at 10000,000.

= 1000000 - 150,000/10000,000 = 0.085

ROE vs EPS

ROE is a better indicator than EPS because of many factors :

Capital use in the profitability of a business

Can be used to compare the performance with other companies in the same business or the other.

EPS figure simply states if a share is undervslued or overvalued.

Also, if ROE is on the higher side, it indicates that it will create better wealth for shareholders and if the EPS is greater than 20 or more, it might shoe that the share prices of the company is overvalued.

In the exaple given in the calculation :

the ROE looks promising as the retuen is positive and around 17% for the investor.

EPS is 0.085 that means the company is undervalued , it has a much greater potential to general more profit for the company and the stockholders as well.