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Return on Equity and Earnings per Share

Return on Equity and Earnings per Share

Both the return on equity (ROE) and earnings per share (EPS) are used to evaluate the financial performance of an organization. The return on equity is a metric that allows the evaluation of a company’s financial performance regarding the use efficiency with which the capital contributed by shareholders is used to generate revenue (Hertina & Saudi, 2019). The calculation of ROE entails dividing a company’s net income by the total shareholder’s equity held in the company. On the other hand, EPS assesses a company’s financial performance regarding growth and valuation. Particularly, EPS measures the amount of revenue an organization makes for every unit of shares held in its stock. The calculation of EPS involves dividing an organization’s net income by the average outstanding shares of the company.

Understanding ROE and EPS are important to a company’s value because they help in pertinent decision-making. For instance, ROE gauges a company’s profitability regarding the utilization of equity funding to run operations. On the other hand, EPS provides a major insight into the market valuation of a company (Hertina & Saudi, 2019). Therefore, understanding the metric helps investors assess whether the company is worth the capital investment. An example of ROE and EPS calculation is below for Walmart Inc. for the most recent financial period.

Ratio Formula 2022
ROE (Net income × 100) ÷ total equity (14,248 × 100) ÷ 82763.5

= 17.22%

EPS Net income ÷ average outstanding shares 13673 ÷ 2792

= 4.9

 

Walmart’s earning per share ratio was 4.9 in the financial period in January 2022. It indicates a good financial performance for the company during the period because $4.9 of revenues can be allocated for every share of its stock. On the other hand, the company’s ROE in the same period was 17.22%. A return on equity of between 15% and 20% is accepted (Kadim et al., 2020). Therefore, the company had a good financial performance.

References

Hertina, D., & Saudi, M. H. M. (2019). Stock return: Impact of return on asset, return on equity, debt to equity ratio, and earning per share. International Journal of Innovation, Creativity and Change6(12), 93-104.

Kadim, A., Sunardi, N., & Husain, T. (2020). The modelling firm’s value is based on financial ratios, intellectual capital, and dividend policy. Accounting6(5), 859-870.

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Question 


You are a research analyst for a publicly traded company, and you’ve been assigned to give a presentation on how a company uses performance metrics in corporate valuation.

Respond to the following in a minimum of 175 words:

Return on Equity and Earnings per Share

Return on Equity and Earnings per Share

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?

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