**= $221,000 ÷ $3,597,000 **
**= 6.1 % **
**Indicated that the company earned 6.1 cent on each $ 1.00 common stockholders’ Asset investment **
**The return on equity (ROE)**
6) Return On Equity ( ROE) =
- Analysts should be concerned if this ratio is too low.
Assume that : Earning available for Common Stockholders = $ 221 , 000 , No. of Shares outstanding = 76,262 , Total assets = $ 3, 597, 000. common stock equity = $1,754,000
So :
**Return On Equity ( ROE**) =
= $221,000 ÷ $1,754 ,000
= 12.6 % INDCATED THAT : During this year the company earned 12.6 cent on each Dollar of Common Stock Equity
**Market Ratios ****: **
- Here we consider two widely quoted market ratios, one that focuses on earnings and another that considers book value :
1) Price/Earnings (P/E) RATIO= .
**Measures the amount that investors are willing to pay for each dollar of a firm’s **
**earnings; the higher the P/E ratio, the greater the investor confidence**
**Market Ratios ****: **
1) Price/Earnings (P/E) RATIO= .
So:
**we need here both the market value ( price ) or selling price of this stock , and earning per share **
- When (Helen Company ) selling its stock at $ 32.25 , and earning per share = $ 2.90
So The P / E Ratio will equal
** = $ 32.25 ÷ $ 2.90 = 11,12 **
**Measures the amount that investors are willing to pay for each dollar of a firm’s **
**earnings; the higher the P/E ratio, the greater the investor confidence**
__MARKET/BOOK (M/B) RATIO__
- The market/book (M/B) ratio provides an assessment of how investors view the firm’s performance. It relates the market value of the firm’s shares to its book— strict accounting—value.
2) Market/book (M/B) ratio =
- Provides an assessment of how investors view the firm’s performance.
- Firms expected to earn high returns relative to their risk typically sell at higher M/B multiples.
Assume that :
Common Stock equity = $1.754.000 and Market price of that share = $ 32.25 , No. of common stock outstanding = 76, 262
**Note That **
calculate the firm’s M/B ratio, we first need to find the book value per share of common stock:
Book value per share of common stock
= *.*
* *
* = 1.754.000÷ 76.262 = $ 22.9 *
*Then *
2) Market/book (M/B) ratio =
= $ 32.25 ÷ $ 22.9
= 1.408
Dr /Samira Allam**.**
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