ROE and EPS
please elaborate on ROE and EPS (corporate finance)
with relative reference
Return on equity (ROE) is the measurement used to determine the profitability of a corporation. Because shareholders equity is equal to a companys assets minus its debt, ROE is considered the return on net assets. (Fernando, 2020) To determine ROE, one must take the net income of a company and divide it by the average shareholders equity. To be more clear, net income is considered after payments are made to preferred shareholders and interest is paid to lenders, but before dividends are paid to common stock shareholders. ROE is expressed as a percentage. Whether that percentage is good or bad for investors depends on the average ROE for the particular industry the company is in. For instance, if Ford Motor Company has an ROE of 15%, but the industry average is 25% then Ford does not have a good ROE.
Another way to determine a companys profitability is to calculate the earnings per share (EPS). Like ROE, the higher the EPS the more profitable the company is considered to be. To calculate EPS, subtract the preferred dividends from net income and divide that number by the end of period common shares outstanding. If there are no preferred dividends then that part is taken out of the equation. The earnings per share metric are one of the most important variables in determining a share’s price. (Fernando, 2020)
Fernando, J. (2020, November 20). Earnings Per Share (EPS). Retrieved December 01, 2020, from https://www.investopedia.com/terms/e/eps.asp
Fernando, J. (2020, November 18). How Return on Equity Works. Retrieved December 01, 2020, from https://www.investopedia.com/terms/r/returnonequity.asp