A public company’s value can be calculated by different approaches depending on the data available and is often shared through quarterly or annual reports or financial statements.
If you were a manager for the Fortune 500 company studied in our class, you may be asked to present how the company uses performance metrics in corporate valuation. Consider how you would present return on equity (ROE) and earnings per share (EPS) to a group of senior management. Review and discuss the Fortune 500 companies' ROE and EPS. What do these results say about the company?
Full Answer Section
Earnings per share (EPS) is a measure of a company's profits per share of common stock. It is calculated by dividing net income by the number of outstanding shares. A higher EPS indicates that the company is generating more profits per share and is therefore more valuable to shareholders.
Both ROE and EPS are important metrics for corporate valuation because they provide insights into a company's profitability and efficiency. Investors use these metrics to compare companies in the same industry and to identify companies that are undervalued or overvalued.
How to present ROE and EPS to senior management
When presenting ROE and EPS to senior management, I would focus on the following:
- Trends: I would show how ROE and EPS have changed over time. This would help senior management to identify whether the company is becoming more or less profitable and efficient.
- Benchmarks: I would compare the company's ROE and EPS to those of its peers. This would help senior management to identify how the company is performing relative to its competitors.
- Drivers: I would explain the key factors that are driving changes in ROE and EPS. This could include factors such as revenue growth, cost control, and asset utilization.
Interpretation of ROE and EPS results
The following table shows the ROE and EPS of some of the Fortune 500 companies:
As you can see, there is a wide range of ROE and EPS results among Fortune 500 companies. This is because companies operate in different industries and have different business models.
A high ROE and EPS are generally considered to be positive signs. However, it is important to note that these metrics are just two of many factors that investors consider when evaluating a company.
Conclusion
ROE and EPS are important metrics for corporate valuation because they provide insights into a company's profitability and efficiency. Investors use these metrics to compare companies in the same industry and to identify companies that are undervalued or overvalued.
When presenting ROE and EPS to senior management, it is important to focus on trends, benchmarks, and drivers. It is also important to interpret the results in context.
Sample Answer
If I were a manager for a Fortune 500 company, and I was asked to present how the company uses performance metrics in corporate valuation, I would focus on two key metrics: return on equity (ROE) and earnings per share (EPS).
Return on equity (ROE) is a measure of how efficiently a company is using its shareholders' equity to generate profits. It is calculated by dividing net income by shareholder equity. A higher ROE indicates that the company is more profitable and is using its shareholders' equity more efficiently.