Tag Archives | financial ratios

Analyzing Your Return on Investment (ROI)

return on investmentReturn on Investment is a useful tool to understand, analyze, and compare different investment opportunities. ROI measures the efficiency of a specific investment by revealing how net earnings recover the cost of the original investment. Have you ever wondered if the result of your investment was really worth the cost? Well, a return on investment model looks at the inputs and assumptions of the ROI equation to determine if the benefits of the investment are worth the costs. Following are the ROI model tools you need to analyze ROI and improve ROI. Then you can determine the value of your investment:

Analyzing Your Return on Investment (ROI)

The first step is to identify and analyze overall benefits from the investment. For different financial situations, the percentage of returns may vary according to what the decision-makers consider to be gains or losses from the investment. As long as you are consistent with how you classify benefits of the investment, you should be able to effectively use your calculations for analysis and comparisons. Focus on benefits which are measurable and attainable. Measure and evaluate tangible benefits to improve ROI percentages.

If the benefits appear significant, then the next step is to identify and analyze associated costs of the investment. Costs are simpler to identify than benefits. Make a list of costs and then breakdown the costs into groups to better categorize the origination of costs. This will enable you to understand where the majority of costs are coming from. Are there any costs that appear inflated? Can you easily reduce some costs? Are there costs that could be eliminated completely? These questions will help you analyze expenses of the investment. Keep in mind that the cost of an investment includes not only the start-up cost, but also the maintenance and improvement of the investment over time.

Improve Return on Investment

To improve the return on your investment, business managers and directors should develop comprehensive and realistic projections for both revenues and expenses. Effective planning will account for unexpected expenses and underperforming sales revenue. By analyzing projections, you should be able to develop strategies to reduce costs and increase sales.

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return on investment, Analyzing Your Return on Investment

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Price Earnings Ratio Analysis

See Also:
Earnings per Share (EPS)
Price to Book Value Ratio
Price to Sales Ratio
Return on Equity Analysis
Preferred Stocks (Preferred Share)
Action Plan

Price Earnings Ratio Analysis Definition

Price earnings ratio (P/E ratio), defined easily as an indicator of how much investors pay for a share compared to the earnings a company generates per share, is as important in stock trading as it is in equity financing markets. It tells investors how expensive a stock is. Therefore, the higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings.

Price Earnings Ratio Analysis Meaning

Price earnings ratio, meaning an indicator to measure a company’s market performance, is one of the many financial ratios used to evaluate an equity investments in private or public markets alike. Companies with high P/E ratios are more likely to be considered risky investments than those with low P/E ratios because a high P/E ratio means high expectations for a company’s potential earnings growth. Since P/E ratio varies from industries to industries, it is more valuable to comparing P/E ratios of companies within the same industry or against a company’s historical P/E ratios.


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Price Earnings Ratio Formula

Two main price earnings ratio formulas exist:

Price earnings ratio = Market price per share ÷ Earnings per share

Or

Price earnings ratio = Average total common stock ÷ Net Income

But one is more suited to public and one to private equity markets. When the market price or earnings per share are not evident, as with the sale of a private corporation, the second option is a simpler choice.

Price Earnings Ratio Calculation

Price earnings ratio calculations are, at their core, a basic division problem.

For example, assume $20 in market price per share and $5 in earnings per share.

Price earnings ratio = 20 / 5 = 4

This means that investors pay $4 for every dollar of earnings that a company generates.

Price Earnings Ratio Analysis Example

After years of working, Barbara has become a professional investor. Barbara makes an effort to diversify her portfolio across all types of investment: stocks, bonds, real estate, angel investment, and more. To Barbara, the most important aspect of investment is knowing what to expect. She likes to get her hands dirty in her work: she skips the web and is her own price earnings ratio calculator.

Barbara has decided to sit down and evaluate her stocks. First, she prepares her tools, a warm cup of coffee, and her mindset. She then begins to look through her public stock portfolio as a whole. Satisfied with her efforts, Barbara digs deeper into the performance of her portfolio companies. She wants to know the price earnings ratio of s&p 500 stocks which she owns. Her average results are listed below:

$20 in average market price per share and $5 in average earnings per share.

Average price earnings ratio = $20 / $5 = $4

Barbara’s price earnings ratio analysis yields the prior results. She then moves on to evaluating her price earnings ratio history for her stocks as an angel investor. Her work sheds light on the following results:

$20 in average total common stock and $5 in average net income.

Average price earnings ratio = $20 / $5 = $4

Conclusion

Price earnings ratio, Dow Jones and small boutique alike, is an equation that gives an important evaluation of the performance of a company an investor has owner’s equity in. In conclusion, Barbara is happy that she can make a living using her natural skills and talents.

Price Earnings Ratio Analysis

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Price Earnings Ratio Analysis

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

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Financial Jargon

See Also:
Categories of Banks
Finding the Right Lender
Funding Source Versus Lender
How to Manage Your Banking Relationship
Interest Rate
Is it Time to Find a New Bank?

Financial Jargon

My client, Elliott, met a friendly banker at a networking function. The banker told him, “I like your business and would like to loan you and your company money”. Elliott spent time with him because he believed if he got to know him it would be easier to borrow money. But, when the time came for Elliott to borrow the money, the answer he got was no.

Elliott called to tell me he did not get the money and was upset because he thought the banker was his friend. My answer to Elliott was, “he probably is your friend. But, you are not getting what you want from the banker (money) because you are not communicating in his language.”

Elliott got mad during our conversation and said things like banks don’t loan you money unless you really don’t need the money. Then to make matters worse, I told him you, are probably right. He thought just because the banker was his friend and friends help friends in time of need, the money would be his for the having. After we talked a while and he settled down, I told him the problem. Bankers are the individuals who have invaded earth from another planet. They come from the planet known as Financial World. They look and act exactly like the rest of us that inhabit earth with one exception, their language. The language they speak is known as Financial Jargon.

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What is this Language of Financial Jargon?

Elliott asked, “What is this language of Financial Jargon?” I told him financial jargon is English or any other language spoken on planet earth but the majority of the human race does not understand the meaning of the words bankers speak. He asked, “Are you talking about financial ratios?” I told him yes, and gave him examples such as current ratioreceivables turnover, net working capital, gross margin, debt coverage, and debt to equity, which are just some of the terms in the language of Financial Jargon.

Sure, Elliott owns a business and survived college where he had taken a finance or accounting course. He even told me he had to memorize all the formulas to earn the grade he received. However, he went on to say, nobody told me I needed to understand the true meaning of these ratios to communicate with an alien known as a Bankers.

Ratios Hold Different Meanings for Bankers

Well, I told him these ratios do have different meanings to your banker than you were taught. Not enough time to teach him the entire language so I just explained one. I said debt to equity ratio could be defined as total debt to shareholders net worth. In college, you were taught this shows how leveraged a company is, in that the lower the ratio, the stronger the company.

To your banker, this ratio tells him who really owns your company; you or your creditors. Bottom line, if this ratio is high, your banker feels they are not talking to the owner of the company and will not loan you any money. So, Elliott, before you try to borrow money again, let’s make sure you are presenting your case in banker’s language.

Instead of using financial jargon around the executive team that doesn’t understand that language, break it down for them. Learn how you can be the best wingman with our free How to be a Wingman guide!

financial jargon

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