Respond To The Following In At Least 175 Words With Citation ✓ Solved
Respond To The Following In A Minimum Of 175 Words With Citationsthin
Respond to the following in a minimum of 175 words with citations: 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?
Sample Paper For Above instruction
Presenting financial performance metrics such as Return on Equity (ROE) and Earnings Per Share (EPS) to investors and senior management is crucial for informed decision-making. ROE measures a company's ability to generate profit from shareholders' equity and is calculated by dividing net income by shareholders' equity (Brigham & Ehrhardt, 2016). EPS indicates the portion of a company's profit allocated to each outstanding share, calculated by dividing net income by the weighted average number of shares outstanding (Ross, Westerfield, & Jaffe, 2019). When explaining these metrics, it is essential to emphasize that a high ROE suggests efficient management and profitable use of equity capital, while a higher EPS indicates greater profitability attributable to shareholders, both of which influence investor perceptions and valuation (Damodaran, 2015).
Understanding ROE and EPS is vital because they directly impact a company's valuation in the stock market. Investors often interpret high ROE and EPS figures as indicators of financial health, management efficiency, and growth potential (Loth, 2019). For example, consider Apple Inc., which reported a net income of $100 billion in 2020, with shareholders' equity of $65 billion, resulting in an ROE of approximately 154% (Apple Inc., 2020). Its EPS was $3.28, driven by strong profitability and share buybacks (Apple Inc., 2020). These figures reflect Apple's efficient use of equity and consistent profitability, reinforcing its position as a leading tech company. Overall, analyzing ROE and EPS helps stakeholders assess a company's operational effectiveness and investment value.
References
Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
Damodaran, A. (2015). Applied Corporate Finance. John Wiley & Sons.
Loth, C. (2019). Financial analysis and valuation. Journal of Business & Finance Librarianship, 24(3), 89-101.
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
Apple Inc. (2020). Apple Annual Report 2020. Retrieved from https://investor.apple.com/