Accounting paper Essay Example | Topics and Well Written Essays - 750 words

Accounting paper - Essay Example Return on equity (ROE), according to the analyst, is considered to be the most significant ratio in order to evaluate a company’s performance from an investor’s point of view. ROE measures a company’s ability to earn a return on all of the capital that is being employed by the company. The ratio is calculated as net income upon total shareholder’s equity. The Stephen’s company ROE amount to 25.45% which can be comprehended as for every $100 invested in the equity of the company, the company generates a return of $25. Any company has a negative financial leverage when the return on common stock holder’s equity is less than the return on assets. In the discussed case, Stephen’s company has a positive financial leverage and thus portrays a sound financial outlook. Earnings per share calculates the $ which is earned by the shareholder per share which is held by him. Stephen’s Company EPS is 7.90 which appears to be quite suitable and portrays sound and strengthened financial outlook. The ratio is calculated by dividing net income minus the dividend paid on preferred stock per the common stocks outstanding throughout the year. Dividend payout ratio on the other hand is calculated by dividing the total dividend paid during the year with the net income. It is basically the percentage of the total net income during the year the directors of the company decide to give out as divided. From an investor’s point of view, the companies with higher dividend payout ratio are the best ventures to invest in. Price per Earning or P/E ratio is calculated by comparing the market price per share with the EPS. Stephen’s company’s P/E ratio is 7.59 which is lower than the industry average of 10. This could be due to the lower share price of Stephen’s company as compared to similar companies in the industry. Lower P/E ratio can