A public companys value can be calculated by different approaches depending on the data available and are often shared through quarterly or annual reports, or financial statements.
If you were a financial and investment analyst for a publicly traded company, you may be asked to give a presentation on how the company uses performance metrics in corporate valuation. Think about how you would present return on equity (ROE) and earnings per share (EPS) to a group of investors or senior management. Review a publicly traded companys ROE and EPS. What do these results say about the company?
Reply to these two classmate’s statements below whether you agree or disagree. State why and explain. or your faculty member. Be constructive and professional. You will respond in 100 words each statement.
1)ROE measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. Its calculated as: ROE = Net Income /Average Shareholders Equity. A higher ROE indicates efficient use of equity capital. It shows how well the company is generating returns on the investment from its shareholders.
EPS indicates the portion of the companys profit allocated to each outstanding share of common stock. It is calculated as: EPS = Net Income – Dividends on Preferred Stock/Average Outstanding Shares.
Looking at Amazons ROE: Amazons current ROE is 10.5%. This indicates that Amazon generates a profit of $0.105 of every dollar of the shareholders equity. Although this isnt exceptionally high, it reflects steady profitability and efficient use of equity. Amazons EPS is currently at $1.30. This means that each share of Amazon stock, the company earned $1.30 in profit. These figures helps investors understand profitability on a per-share basis.
2)I would want to ensure that the metrics being presented tell a story, ensuring my investors get the desired ROI. Ensuring the financial health of the business to investors will determine the solvency of the business. The ROE is the carrot to investors. It tells them whether to invest their money in a company. For instance, Walmarts equity decreased in 2021, 2022 and 2023, and increased in 2020 and 2024. Although there were decreases in the company it was still solvent. The company continued to have ROE even when substantial year over year decreases took place.
Earnings Per Share (EPS) measures a companys profitability by indicating how much profit per share it has earned. The higher the EPS per share the more profitable the company is. However, like so many financial metrics, Earnings Per Share (EPS) is best used when comparing against other like markets from the same industry isolating a period. Steady increases in EPS means the company is solvent and a place where investors definitely want to invest their money.