Question

I chose Verizon XNYS as my company to base my work off of.

1. ROE for the last 3 years: 2017= 91.74% 2016=67.40% 2015=124.48%

Net Profit Margin for the last 3 years: 2017=23.88% 2016= 10.42% 2015= 13.58%

Asset Turnover for the last 3 years: 2017= .50% 2016= .52% 2015= .55%

Financial Leverage for the last 3 years: 2017= 5.97% 2016= 10.84% 2015= 14.89%

I used the competitor, Comcast CMCSA.

ROE for the last year= 37.07%

Net Profit Margin for the last year= 26.87%

Asset Turnover for the last year= .46%

Financial Leverage for the last year= 2.73%

1. Has the company’s ROE changed over the last three years? What was the main factor that influenced this change?
2. Compare the ratios of you company to the peer competitor. If the management of the company would like to improve their return on equity, what should the management of the company do?

Answer 1

Answer

ROE=

2017=91.74

2016=67.40

2015=124.48

Yes ROE has changed over time

Return on equity is important because a steady flow of income increases the company's assets, growing the value of the owners' share. In the United States and the UK, ROE averages around 10-to-12 percent. If you want to measure whether your ROE is good, comparing it to the average for your industry may be a better benchmark.

Factors That Contribute to Change in Return on Equity

Anyone who buys stock in your company hopes you'll use their investment to make more money. Return on equity (ROE) is a way to measure that. You measure ROE by dividing the owners' stake in the company into net income. If your income for the year is $50,000 and owners' equity is $500,000, ROE equals 10 percent. ROE may rise or fall as different factors come into play.

Equity and ROE

You find owners' equity on the company's balance sheet. The value of the total assets equals the total liabilities plus owners' equity. Subtract the liabilities from the assets and equity is what remains. If, say, you have $500,000 in assets and $200,000 in liabilities, the equity is $300,000.

Return on equity is important because a steady flow of income increases the company's assets, growing the value of the owners' share. In the United States and the UK, ROE averages around 10-to-12 percent. If you want to measure whether your ROE is good, comparing it to the average for your industry may be a better benchmark.

ROE and Management

If ROE is growing, that's typically a sign of good management. The company's earning a profit on its assets, and the profits are increasing over time. If you reinvest the money in the company, that increases the total assets, which in turn increases shareholders' equity. If ROE drops, that's often a sign management is making poor reinvestment decisions or not generating enough income.

Other Factors

Management isn't the only factor that affects ROE. For example, some companies take on debt to buy back stock from the owners. Because that reduces the total equity in favor of liabilities, ROE goes up even if net income doesn't change.

The downside? Taking on debt means paying back the loan, plus interest. If the market goes south, that can leave the company struggling to keep up the payments and seeing profits sucked up to pay the interest.

Even without a stock buyback, a company can use debt to buy new assets. If that increases net income, ROE goes up. But like buying back stock, the debt can drag down the company's performance, slowing ROE to a crawl.

ROE will also grow if the company writes down its assets because they're overvalued. As the total asset value shrinks, so does owners' equity. If income remains the same, ROE becomes higher even though the company hasn't changed anything but the bookkeeping

Comparison of rations of 2 comapny

ROE of XNYS= 91.74 and ROE of CMCSA=26.87

ROE is more than a measure of profit; it's a measure of efficiency. XYNS ROE suggests that a company has   ability to generate profit without needing as much capital. It also indicates how well a company's management is deploying the shareholders' capital. In other words, the higher the ROE the better.

Net profit margin of XYNS is 23.88 and that of CMCSA is 26.87%

The net profit margin, also known as net margin, indicates how much net income a company makes with total saldes achieved. Ahigher net profit margin means that a company is more efficient at converting sales into actual profit. . Therefore CMCSA is in better position.

Financial leverage of XYNS is 5.97 and that of CMCSA is 2.73

It means latter employs less debt is its capital structure.

Asset turnover ration of XYNS is 0.5% and that of rival is 0.46%

XYNS is in better position as asstes are ustilised better for earning sales .

Improving return on equitu

Return on equity is a must-know financial ratio. It explains, mathematically, the ratio of a company's net income relative to its shareholder equity.

Net Income Shareholder's Equity

In essence, it captures the return a company generates on capital that is owned by the shareholders.

A company can improve its return on equity in a number of ways, but here are the five most common.

Use more financial leverage
Companies can finance themselves with debt and equity capital. By increasing the amount of debt capital relative to its equity capital, a company can increase its return on equity.

Increase profit margins
As profits are in the numerator of the return on equity ratio, increasing profits relative to equity increases a company's return on equity. Increasing profits does not necessarily have to come from selling more product. It can also come from increasing prices of each product sold, lowering the cost of goods sold, reducing its overhead expenses, or a combination of each.

Improve asset turnover
Asset turnover is a measure of a company's efficiency. You can calculate it by dividing sales by the company's total assets. In general, the more sales a company produces relative to its assets, the more profitable it should be, and the higher return on equity it should earn.