The Effect of Changes in Return on Assets, Return on Equity, and Economic Value Added to the Stock Price Changes and Its Impact on Earnings Per Share
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CFA Level 1 Financial Ratios Sheet
CFA Level 1 Financial Ratios Sheet Activity Ratios Solvency ratios Ratio calculation Activity ratios measure how efficiently a company performs Total debt Debt-to-assets day-to-day tasks, such as the collection of receivables and Total assets management of inventory. The table below clarifies how to Total debt Dept-to-capital calculate most of the activity ratios. Total debt + Total shareholders’ equity Total debt Dept-to-equity Total shareholders’ equity Activity Ratios Ratio calculation Average total assets Financial leverage Cost of goods sold Total shareholders’ equity Inventory turnover Average inventory Number of days in period Days of inventory on hands (DOH) Coverage Ratios Ratio calculation Inventory turnover EBIT Revenue or Revenue from credit sales Interest coverage Receivables turnover Interest payements Average receivables EBIT + Lease payements Number of days Fixed charge coverage Days of sales outstanding (DSO) Interest payements + Lease payements Receivable turnover Purchases Payable Turnover Average payables Profitability Ratios Number of days in a period Number of days of payables Payable turnover Profitability ratios measure the company’s ability to Revenue generate profits from its resources (assets). The table below Working capital turnover Average working capital shows the calculations of these ratios. Revenue Fixed assets turnover Average fixed assets Return on sales ratios Ratio calculation Revenue Total assets turnover Average total assets Gross profit Gross profit margin Revenue Operating profit Operating margin Liquidity Ratios Revenue EBT (Earnings Before Taxes) Pretax margin Liquidity ratios measure the company’s ability to meet its Revenue short-term obligations and how quickly assets are converted Net income Net profit margin into cash. The following table explains how to calculate the Revenue major liquidity ratios. -
Mortgage-Equity and 9 Residual Valuation Techniques
MORTGAGE-EQUITY AND 9 RESIDUAL VALUATION TECHNIQUES Introduction In this chapter we move from the stable income, all-cash world depicted in the previous chapter, to the reality that property is typically purchased with financing, creating debt leverage. Our focus is the mortgage- equity or M-E technique. This valuation technique is founded on the premise that the overall rate should reflect the importance of separate yields attributable to the equity position and to the debt position. The M-E technique is not as commonly used as capitalization or discounted cash flow in everyday real estate practice. However, the M-E technique is helpful in certain situations to: $ determine overall rates; $ derive building and land capitalization rates for residual techniques; $ analyze the capitalization rates derived through other techniques; $ test separately determined value estimates; or $ graphically analyze financial components of an overall rate.1 This chapter begins with some history on the evolution of the M-E method. Early valuation methods did not consider the impact of mortgage financing. To explore this impact, economists in the 1950s developed new valuation techniques, the first of which was Band of Investment or BOI. Roughly speaking, BOI can be considered a forerunner to the mortgage-equity method, so in order to better understand M-E, it is useful to have a quick primer on its BOI predecessor. The goal of BOI is to determine an overall capitalization rate by building up the rate from the key factors that investors consider when making an investment decision. These factors include: • The initial loan-to-value ratio; • Interest rate on the loan; • The entrepreneur’s equity investment; and • The rate of return on investment expected. -
Return on Assets and Its Decomposition Into Operating and Non- Operating Segments
International Journal of Latest Engineering and Management Research (IJLEMR) ISSN: 2455-4847 www.ijlemr.com || Volume 02 - Issue 09 || September 2017 || PP. 22-31 Return on Assets and Its Decomposition into Operating and Non- Operating Segments C.A. (Dr.) Pramod Kumar Pandey Associate Professor, National Institute of Financial Management, Faridabad Abstract: Return on total assets (ROA) is a significant indicator of growth of business operations of an entity. It is broader concept than Return on equity (ROE) and Return on investment (ROI). Increase in Return on total assets (ROA) creates wealth for all stakeholders as against Return on Equity (ROE) which creates returns only for Equity Shareholders. This paper has analyzed Return on total assets (ROA), Return on equity (ROE) and Earnings per share (EPS) after decomposition of each into operating and non-operating segments. This paper concludes that for better financial analysis both operating and non-operating segments of return on total assets (ROA), Return on investment (ROE) and Earnings per share (EPS) should be analyzed. Keywords: ROA, ROI, ROE, Operating and Non-operating JEL CLASSIFICATION: M41, G32, G33 and G34 I. Introduction Return on total assets (ROA) is a significant indicator of growth of business operations of an entity. It is broader concept than return on equity (ROE) and return on investment (ROI). Increase in Return on total assets (ROA) creates wealth for all stakeholders as against Return on Equity (ROE) which creates returns only for Equity Shareholders. Further, Return on investment (ROI) takes into consideration only shareholders and lenders but ignores current liabilities. It tells how much return has been generated by investing Rupee one of the capital employed. -
Equity Valuation Using Multiples: an Empirical Investigation
Equity Valuation Using Multiples: An Empirical Investigation DISSERTATION of the University of St.Gallen Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor of Business Administration submitted by Andreas Schreiner from Austria Approved on the application of Prof. Dr. Klaus Spremann and Prof. Dr. Thomas Berndt Dissertation no. 3313 Deutscher Universitäts-Verlag, Wiesbaden 2007 The University of St. Gallen, Graduate School of Business Administration, Eco- nomics, Law and Social Sciences (HSG) hereby consents to the printing of the pre- sent dissertation, without hereby expressing any opinion on the views herein ex- pressed. St. Gallen, January 22, 2007 The President: Prof. Ernst Mohr, Ph.D. Foreword Accounting-based market multiples are the most common technique in equity valuation. Multiples are used in research reports and stock recommendations of both buy-side and sell-side analysts, in fairness opinions and pitch books of investment bankers, or at road shows of firms seeking an IPO. Even in cases where the value of a corporation is primarily determined with discounted cash flow, multiples such as P/E or market-to-book play the important role of providing a second opinion. Mul- tiples thus form an important basis of investment and transaction decisions of vari- ous types of investors including corporate executives, hedge funds, institutional in- vestors, private equity firms, and also private investors. In spite of their prevalent usage in practice, not so much theoretical back- ground is provided to guide the practical application of multiples. The literature on corporate valuation gives only sparse evidence on how to apply multiples or on why individual multiples or comparable firms should be selected in a particular context. -
The Impact of Earning Per Share and Return on Equity on Stock Price
SA ymTsuHltRifaeEcvetePIdMhreavirePwmjoA2ur0nCa2l Ti0n;t1hOe1fi(eF6ld)o:Ef1ph2Aa8rmR5a-cNy12I8N9 G PER SHARE AND RETURN ON EQUITY ON STOCK PRICE a JaDajeapnagrtBmaednrtuozfaAmcacnounting, Faculty of Economics and Business, Siliwangi University of Tasikmalaya [email protected] ABSTRACT Research conducted to determine the effect of Earning Per Share and Return on Equity on Stock Prices, a survey on the Nikkei 225 Index of issuers in 2018 on the Japan Stock Exchange. the number of issuers in this study was 57 issuers. The data taken is the 2018 financial report data. Based on the results of data processing with the SPSS version 25 program shows that Earning Per Share and Return on Equity affect the Stock Price of 67.3% and partially Earning Per Share has a positive effect on Stock Prices. Furthermore, Return on Equity has a negative effect on Stock Prices. If compared to these two variables, EPS has the biggest and significant influence on stock prices, however, Return on Equity has a negative effect on stock prices Keywords: Earning Per Share, Return on Equity and Stock Price INTRODUCTION Investors will be sure that the investment can have a People who invest their money in business are interested positive impact on investors. Thus, eps is very important in the return the business is earning on that capital, for investors in measuring the success of management in therefore an important decision faced by management in managing a company. EPS can reflect the profits obtained relation to company operations is the decision on the use by the company in utilizing existing assets in the of financial resources as a source of financing for the company. -
Sustainable Growth Rate, Optimal Growth Rate, and Optimal Payout Ratio: a Joint Optimization Approach
Sustainable Growth Rate, Optimal Growth Rate, and Optimal Payout Ratio: A Joint Optimization Approach Hong-Yi Chen Rutgers University E-mail: [email protected] Manak C. Gupta Temple University E-mail: [email protected] Alice C. Lee* State Street Corp., Boston, MA, USA E-mail: [email protected] Cheng-Few Lee Rutgers University E-mail: [email protected] March 2011 * Disclaimer: Views and opinions presented in this publication are solely those of the authors and do not necessarily represent those of State Street Corporation, which is not associated in any way with this publication and accepts no liability for its contents. Sustainable Growth Rate, Optimal Growth Rate, and Optimal Payout Ratio: A Joint Optimization Approach Abstract Based upon flexibility dividend hypothesis DeAngelo and DeAngelo (2006), Blua Fuller (2008), and Lee et al. (2011) have reexamined issues of dividend policy. However, they do not investigate the joint determination of growth rate and payout ratio. The main purposes of this paper are (1) to extend Higgins’ (1977, 1981, and 2008) sustainable growth by allowing new equity issue, and (2) to derive a dynamic model which jointly optimizes growth rate and payout ratio. By allowing growth rate and number of shares outstanding simultaneously change over time, we optimize the firm value to obtain the optimal growth rate and the steady state growth rate in terms of a logistic equation. We show that the steady state growth rate can be used as the bench mark for mean reverting process of the optimal growth rate. Using comparative statics analysis, we analyze how the optimal growth rate can be affected by the time horizon, the degree of market perfection, the rate of return on equity, and the initial growth rate. -
Earnings Yield As a Predictor of Return on Assets, Return on Equity, Economic Value Added and the Equity Multiplier
Modern Economy, 2017, 8, 10-24 http://www.scirp.org/journal/me ISSN Online: 2152-7261 ISSN Print: 2152-7245 Earnings Yield as a Predictor of Return on Assets, Return on Equity, Economic Value Added and the Equity Multiplier Rebecca Abraham, Judith Harris, Joel Auerbach Huizenga College of Business, Nova Southeastern University, Fort Lauderdale, Florida, USA How to cite this paper: Abraham, R., Abstract Harris, J. and Auerbach, J. (2017) Earnings Yield as a Predictor of Return on Assets, This study identifies earnings yield as a measure of financial performance that Return on Equity, Economic Value Added is based on a firm’s ability to sell profitable goods. It excludes the irrationality and the Equity Multiplier. Modern Econo- that can confound market-based measures of financial performance by em- my, 8, 10-24. http://dx.doi.org/10.4236/me.2017.81002 phasizing a firm’s ability to earn profits as the indicator of superior perfor- mance. For the full sample, the differential effects of earnings yield on return Received: December 5, 2016 on assets, return on equity, stock returns, economic value added and the eq- Accepted: January 6, 2017 uity multiplier are determined for firms of different size and volatility. The Published: January 9, 2017 analysis is conducted both across industries and within the oil and gas, com- Copyright © 2017 by authors and puter software, biotechnology and retail industries. For the full sample of Scientific Research Publishing Inc. NASDAQ stocks from 2010-2014, earnings yield significantly explained re- This work is licensed under the Creative turn on assets, return on equity, stock returns, economic value added and the Commons Attribution International License (CC BY 4.0). -
Study on the Enterprise Sustainable Growth and the Leverage Mechanism
Vol. 4, No. 3 International Journal of Business and Management Study on the Enterprise Sustainable Growth and the Leverage Mechanism Rui Huang & Guiying Liu College of Industry and Commerce Administration Tianjin Polytechnic University Tianjin 300387, China E-mail: [email protected] Abstract The sustainable growth is the necessary condition for the survival and the development of the enterprise, and it is thought as the scale to measure the strength of the enterprise. In this article, we first compared the James·C·VanHorne sustainable growth model and the Robert·C·Higgins sustainable growth model, and analyzed the main mechanism of two sorts of leverage, i.e. the influencing degree of different intervals to the profits, and established the sustainable growth model based on the leverage effect, and simply validated the data. The sustainable growth model based on the leverage effect could make the investors consider the functions of two sorts of leverage, design various financial indexes suiting for the survival and development of the enterprise, reasonably invest and finance to realize the sustainable growth of the enterprise before they grasp the investment and financing situation of the enterprise. Keywords: Enterprise sustainable growth, Degree of Operating Leverage (DOL), Degree of Financial Leverage (DFL) 1. Introduction The financial idea of the sustainable growth means the actual growth of the enterprise must harmonized with its resources. The quicker growth will induce the shortage of the corporate resources and even the financial crisis or bankruptcy. And slower growth will make the corporate resources can not be effective utilized, which will also induce the survival crisis of the enterprise. -
Measuring Lending Profitability at the Loan Level: an Introduction
FINANCIAL PERFORMANCE Measuring Lending Profitability at the Loan Level: An Introduction [email protected] 877.827.7101 www.ProfitStars.com FINANCIAL PERFORMANCE “How much am I making on this deal?” has been a fundamental question posed by bankers for as long as currency has been used as a medium of exchange. This has never been an easy question to answer, as doing so requires one to consider a variety of revenues and costs, many of which are anything but straightforward to quantify. Loan pricing models attempt to do this by computing the interest rate necessary to fairly compensate lenders for all of the costs of delivering money to their customers. These include not only tangible costs (e.g., their own cost of funds, salaries and other overhead) but the less tangible, indirect costs of bearing risk in many different forms. This is achieved by disaggregating the various costs of doing business in the banking industry and assigning a value to each of those costs. Having done this, a loan-level net income and return on allocated capital can be determined for various combinations of loan interest rates, fees and other sources of revenue. Many lending institutions employ less-than-scientific methods for pricing loans. Lending rates are usually a function of the competitive environment, with rates being set at whatever the market will bear. This “seat of the pants” approach can and often does get banks in trouble. Loans that are booked (in hindsight) at less than profitable spreads can become a significant drag on a bank’s net interest margin and earnings, even if none of them default. -
Chapter 6 Growth in Sales and Value Creation in Terms of the Financial
University of Pretoria etd – De Wet, J H v H (2004) CHAPTER 6 GROWTH IN SALES AND VALUE CREATION IN TERMS OF THE FINANCIAL STRATEGY MATRIX 6.1 INTRODUCTION It is very important for all companies to manage growth. It is possible for a company to grow without adding value, and the quality of the growth, or lack of it, is revealed by the calculation of the EVA for that particular company. A positive EVA (or NPV) for an expansion project indicates that the growth in assets and sales in terms of that project will add value after taking into account the full cost of capital. This issue has been dealt with in detail in previous chapters. Another aspect of growth that is vital to an organization is the pace at which it grows. As long as a company has easy access to additional shareholders’ funds or borrowed funds, it can increase its assets (and therefore also its sales) almost as rapidly as it likes, provided the demand is large enough. If the company does not want to raise new shareholders’ funds to finance growth, it can use internally generated funds plus an amount of borrowings (limited by the target capital structure). Managers are often reluctant to issue new shares for a number of reasons. The most important reasons are the possibility of a loss of control when new shareholders take up shares, and the fact that new issues are expensive due to flotation costs. Consequently, it is preferable to finance growth from retained 154 University of Pretoria etd – De Wet, J H v H (2004) income as well as an appropriate amount of debt, in order for the target capital structure to remain the same. -
Lecture Note Packet 2 Relative Valuation and Private Company
Valuation: Lecture Note Packet 2" Relative Valuation and Private Company Valuation Aswath Damodaran Updated: January 2012 Aswath Damodaran 1 The Essence of relative valuation? In relative valuation, the value of an asset is compared to the values assessed by the market for similar or comparable assets. To do relative valuation then, • Need to identify comparable assets and obtain market values for these assets. • Convert these market values into standardized values, since the absolute prices cannot be compared. This process of standardizing creates price multiples. • Compare the standardized value or multiple for the asset being analyzed to the standardized values for comparable asset, controlling for any differences between the firms that might affect the multiple, to judge whether the asset is under or over valued Aswath Damodaran 2 Relative valuation is pervasive… Most valuations on Wall Street are relative valuations. • Almost 85% of equity research reports are based upon a multiple and comparables. • More than 50% of all acquisition valuations are based upon multiples. • Rules of thumb based on multiples are not only common but are often the basis for final valuation judgments. While there are more discounted cashflow valuations in consulting and corporate finance, they are often relative valuations masquerading as discounted cash flow valuations. • The objective in many discounted cashflow valuations is to back into a number that has been obtained by using a multiple. • The terminal value in a significant number of discounted cashflow valuations is estimated using a multiple. Aswath Damodaran 3 Why relative valuation? “If you think I’m crazy, you should see the guy who lives across the hall” Jerry Seinfeld talking about Kramer in a Seinfeld episode “ A little inaccuracy sometimes saves tons of explanation” H.H. -
Financial Analysis: Do IFRS Standards Signal the End of the ROCE? by Bruno Husson()1
Financial analysis: Do IFRS standards signal the end of the ROCE? By Bruno Husson()1 Financial analysts are - or should be - amongst the most assiduous readers of the consolidated accounts published by listed companies, quite simply because this reading is one of the key components of their profession. By neglecting to do so at the height of the stock-market frenzy in 1999-2000, several star analysts had their fingers burnt and tarnished the credibility of an entire profession. More recently, examples of large scale accounting malpractice, as revealed by Enron-type stock- market scandals, have shown the difficulties faced by financial analysts and the importance of the issues underlying thorough analysis of accounting data.()2 In other words, such events militate strongly in favour of a return to established professional principles which dictate that a meticulous examination of previous accounting statements represents the obligatory starting point for any analysis. In such a context, the new IFRS accounting standards, which shall apply to any listed European company from 2005 onwards, seem to arrive at just the right moment, as they are primarily designed to improve the quality of the financial information that is available to investors with regard to their investment choices. Furthermore as their very role is to shed light on these choices, financial analysts should be very pleased about the arrival of these new standards. However, the widely-voiced scepticism towards the IFRS clearly shows that this is not the case. The reasons for this situation are explained in this article, which analyses the impact of the IFRS on the calculation and interpretation of one of the most emblematic ratios in modern financial analysis: the ROCE (Return On Capital Employed).