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16 Cards in this Set
- Front
- Back
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Return on Equity
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A measure of a corporation's profitability, calculated as:
Net Income / Shareholder's Equity how much profit a company generates with the money shareholders have invested in it. |
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ROE useful for
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for comparing the profitability of a company to that of other firms in the same industry.
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Three "levers" of ROE
aka three pillars of corporate management |
profitability
asset management financial leverage |
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If the return on equity is 20%, for instance, then
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twenty cents of assets are created for each dollar that was originally invested.
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A business that has a high return on equity is
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more likely to be one that is capable of generating cash internally.
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If you owned a business that had a net worth [shareholder’s equity] of $100 million dollars and it made $5 million in profit, it would be earning
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5% on your equity [$5 / $100 = .05, or 5%]. The higher you can get the “return” on your equity, in this case 5%, the better.
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capital
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1. Financial assets or the financial value of assets such as cash.
2. The factories, machinery and equipment owned by a business. an extremely vague term whose specific definition depends on the context in which it is used. In general, it refers to financial resources available for use. |
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equity
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1. Stock or any other security representing an ownership interest.
2. On the balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). ownership in any asset after all debts associated with that asset are paid off. |
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earnings per share
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The portion of a company's profit allocated to each outstanding share of common stock.
EPS serves as an indicator of a company's profitability. Calculated as: (Net Income - Dividends on Prefered Stock) / Average Outstanding Shares |
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return on equity indicates
whereas return on capital indicates |
how well a company is doing with the money it has now
how well it will do with further capital. |
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profit margin
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net income / revenues OR
net profits / sales measures how much out of every dollar of sales a company actually keeps in earnings. very useful when comparing companies in similar industries. |
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higher profit margin indicates
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a more profitable company that has better control over its costs compared to its competitors.
Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales. |
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asset turnover
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The amount of sales generated for every dollar's worth of assets.
It is calculated by dividing sales in dollars by assets in dollars. revenue / assets |
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asset turnover measures
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a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better.
It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, WHILE those with high profit margins have low asset turnover. |
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Total asset turnover answers the question:
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How much sales revenue does the company generate from its investment in assets?
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companies with low profit margins tend to have
those with high profit margins have |
high asset turnover
low asset turnover |
