Performance Evaluation

Performance Evaluation

Financial ratios play a significant role in influencing and measuring company performance. The metrics derived from the financial statements help assess a company’s financial performance. The major aspects influenced and measured by financial ratios include profitability, liquidity, efficiency, gearing, and market valuation (Hidayat et al., 2020). For this task, the use of the return on assets (ROA) and the price-to-earnings (PE) is assessed. Notably, ROA is a financial ratio that measures a company’s profitability based on the utilization of assets to generate revenues. On the other hand, the price-earnings ratio is a market valuation and growth metric that assesses a company’s performance regarding overvaluation or undervaluation.

The calculation of ROA includes dividing the net income earned by the total assets held by the company and is expressed as a percentage. On the other hand, the PE ratio is calculated by dividing a company’s share price by the earnings per share. Notably, market conditions influence these two metrics in different ways. First, when the market conditions are favorable, companies make high profits, which pushes the company’s ROA higher. The reverse is true because adverse market conditions reduce the ROA of a company. On the other hand, when market conditions are favorable, companies make significant revenues and earnings per share go high, which pushes the PE ratio high. The calculation of ROA and PE ratios for Amazon.com Inc. is provided below.

Ratio	Formula	2021
ROA	(Net income ×100)/Total Assets	(33,364 × 100)/370,872 = 9.0%
PE	Share price/Earnings per share	2082.00/41.43 = 50.52

The ROA of the company indicates good financial performance because, in the industry, a ratio of between 5% and 20% is generally preferred (Al-Marzooqi & Nobanee, 2020). For shareholders, low PE ratios are preferred, and thus, the company’s performance is not good because the PE ratio is high.

References

Al-Marzooqi, M. B., & Nobanee, H. (2020). Financial Analysis of Amazon. Available at SSRN 3647442.

Hidayat, W., Tjaraka, H., Fitrisia, D., Fayanni, Y., Utari, W., Indrawati, M., & Imanawati, Z. (2020). The effect of earning per share, debt to equity ratio, and return on assets on stock prices: Case Study Indonesian. Academy of Entrepreneurship Journal, 26(2), 1-10.

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You are writing a book on how to evaluate the performance of a company.

Respond to the following in a minimum of 175 words:

Think about some of the influences and measures of company performance that you read about this week.
Explain the use of return on assets (ROA) and the price-to-earnings (PE) ratio in evaluating the performance of a company.
Write about how to calculate ROA and PE ratio and how market conditions can affect these metrics.
Share the ROA and PE ratio for a company you are familiar with. What do these metrics tell you about the financial health of the company?