Question

• 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

I would present trends of increase in return on equity as well as earning per share to the the group of investors and senior management. I would be looking for comparing the return on equity with the cost of capital and then highlight the profit trends which will be used in calculation of earnings per share.

Return on equity and earnings per share is used as a tool for attracting prospective investors by communicating them that company is on a growing trend through growth in its return on equity as well as earnings per share.

Return on equity will be calculated by dividing the net income of the company by shareholders equity and then multiplying it 100 so it is a percentage return. While earning per share is dividing the net income of the company by shareholders equity to find earning per equity share.

understanding of earning per share and return on equity is important because it tells you about the growing or declining trend of the company. it also tells you about how much the company is able to exceed the cost of capital through its generation of income by return on equity.

I have calculated return on equity and earning per share of Reliance industries which is 40 rupees per share and it is trading at healthy price to earning ratio of 20. These results tell that Reliance is a continuous profit making and income generating company for its shareholders and it is richly priced by the markets as well.