2. 2
• Investment Ratios: Introduction
1 • Return on Average Common Stockholders’ Equity (ROE)
2 • Earnings per Share (EPS)
3 • Price-Earnings Ratio (P/E)
4 • Return on Common Equity (ROCE)
5 • Market to Book Ratio Value
Investment (SHARE) Ratios
3. 3Investment (SHARE) Ratios
• Investment ratios are used to
assess the performance of a
company's shares
• In addition to being of great
interest to the ordinary
shareholders, investment ratios
are also of interest to potential
investors, analysts and
competitors
5. 5Example: Income Statement
Gross margin = net sales – cost of goods sold
= 450000 – 127000 = 323000
Net operating income = gross margin –
operating expenses
= 323000 – 249000 = 74000
Net income before taxes = net operating
income – interest expense
= 74000 – 8000 = 66000
Net income = net income before taxes – less
income taxes
= 66000 – 19800 = 46200
7. 7
• It is a measure of financial performance calculated by dividing net
income by shareholders' equity
ROE =
Net Income
Average Common Stockholders’ Equity
ROE =
$ 53690
$ 180000 + $ 234390 ÷ 2
=
$ 53690
$ 207195
= % 25.9
1- Return on Average Common Stockholders’ Equity (ROE)
• Important measure of the income-producing ability of a company
• The higher the ROE, the more efficient a company's management is
at generating income and growth from its equity financing
8. 8
EPS =
Earning Available to Common Stockholders
End-of-Period Common Share Outstanding
2- Earnings per Share (EPS)
EPS =
$ 53690
$ 17000 + $ 27400 ÷ 2
=
$ 53690
$ 22200
= $ 2.42
Earnings per share (EPS) are calculated as a company's profit divided
by the outstanding shares of its common stock
• The higher a company's EPS, the more profitable it is considered
• The financial press regularly publishes actual and forecasted EPS amounts
9. 9
P/E =
Market Price Per Share
EPS
P/E =
$ 20.00
$ 2.42
= 8.3 ∶ 1
3- Price-Earnings Ratio (P/E)
is a measure of the current share price of a company as compared to
per-share earnings (market value per share divided by earnings per
share(
• The higher the ratio, the greater the amount that an investoris willingto pay for $1 of
current earnings; so a stock with a high P/E is generally expected to increase in value
• A stock with a low P/E may already be doing well,or it may simply be undervalued
• Provides some measure of whetherthe stock is under or overpriced
10. 10
ROCE =
Net Income – Preferred dividends
Common Equity
ROCE =
$ 53690 −$ 0.00
$ 234390
= % 22.9
4- Return on Common Equity (ROCE)
• the better benchmark is to compare a company’s return on common
equity with its industry average. In conclusion, the higher the ratio, the
better the company
• The amount of profit or net income a company earns per investment dollar
• This is often beneficial because it allows companies and investors alike to see what
sort of return the voting shareholders are getting if preferred and other types of
shares are not counted
11. 11
Price/Book Value Ratio =
Market Price Per Share
Book Value Per Share
5- Market to Book Ratio Value (Price/Book Value Ratio)
• used to evaluate a company’s current market value relative to its book value
• The market value is the current stock price of all outstanding shares (i.e. The price
that the market believes the company is worth)
• A low ratio (less than 1) could indicate that the stock is undervalued(i.e. A bad investment)
• A higher ratio (greater than 1) could mean the stock is overvalued(i.e. It has performed
well)
• A low ratio could also indicate that there is something wrong with the company. This ratio
can also give the impression that you are paying too much for what would be left if the
company went bankrupt