Question

Assume that Beta Corp. earns net income of $1,000,000 in the current year. Identify two important factors that investors should consider in evaluating the reasonableness of this dollar amount. Explain what investors may learn from each of these considerations.

Answer 1

Two important factors that investors should consider are as follows:

1. Growth of net income
2. Return on assets

Growth of net income - Investors should consider the liquidity of balance sheet before assessing the growth of net income. Verifying whether there is growth of net income compared to previous financial years is also considered important.

Return on assets - It is a profitability ratio measures how efficient a company's management is generating earnings from their economic resources or assets on their balance sheet. It also provides how much profit the company is generating from the assets.

Investors may learn the following from these considerations:

Growth is very important in every aspect in the company whether monetary or not. In the company's growth it is important to see whether there is growth of net income or not. It actually helps to determine whether the company is growing or not.

The growth of sales and the net earnings growth should be of the same rate otherwise it is considered as the company's earnings are growing but the revenue is going down. Finally the comparison of growth of net income with earnings per share helps to determine whether any share issuances weighed down the growth of earnings per share.

There are various measurements in comparing the returns the company is earning. These measurement helps the company determine what a company is achieving with its earnings compared to how much the company is spending I'm bringing those earnings.

A Company worth investing will have high returns. Generally every company will have 30 percent returns annually. Return on assets means dividing the net income with the total assets of the company. Examining a company's return on assets will help determine how much company is using the assets in bringing the revenue.

Investors should learn about these considerations much deeper to understand any company and it's nature. These considerations help to examine whether the company is worth investing or not. For every company the returns and the growth are very important.

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