Why are ROE and EPS such important measures of performance to investors?
Investment companies and business organizations use various tools and methodologies in evaluating their performances and profitability ratio. Return on Equity and the Earning per share are some of the common methods that companies use in determining the profitability ratio and financial position of the company (Anwaar, 2016). Return on equity evaluates the returns or profits that shareholders would get from an investment while EPS evaluates the actual earnings that would be earned from every share of common stock. Many companies use both ROE and EPS in the annual or quarterly analysis of the financial statements of the company. The analysis helps the company in many ways as far as the financial well being of the company is concerned.
Apparently, ROE helps investors to know the management's ability in generating profits in any common equity investment. Equally, EPS helps the investors to measure how much profits would be generated from every share (Laing & Dunbar, 2015) When the return on equity is high, the company has large dominance in the market and high pricing power while a low ROE indicates poor performance in the market. On the other hand, when a company has a consistent growth in EPS ratios, it is considered to be financially stable. Hence, both EPS and ROE are indicators of company success (Anwaar, 2016).
For instance, when the ROE and the EPS are negative or low, the company's financial strength is low. Therefore, the company will be able to come up with a viable management decision that will boost the companies’ operations to save it from experiencing losses. Hence, investors will always look at the number or ratio of the ROE and EPS since the financing and investment outcome from projects are largely determined by the data provided. Considering both of them would, therefore, enhance positive growth in the company's financial state.
Anwaar, M. (2016). Impact of firms' performance on stock returns (evidence from listed companies of FTSE-100 index London, UK). Global Journal of Management and Business Research.
Laing, G., & Dunbar, K. (2015). EVA (TM) EPS, ROA, and ROE as measures of performance in Australian banks: a longitudinal study. Journal of Applied Management Accounting Research, 13(1), 41.
by EssayRoyal, Dec. 7, 2019, 7:31 p.m.