Financial Accounting - P-E ratio

Running head: FINANCIAL ACCOUNTING 1
Financial Accounting
Student’s Name
Affiliation Institution

FINANCIAL ACCOUNTING 2
1. Research and find the meaning of the bolded and underlined terms. Include this in
your response.
Price-earnings ratio
The price-earnings ratio (P-E ratio) is the oft-quoted statistic that measures the rate of the
market price of each share of common stock to the EPS. The price-earnings ratio is the
reflection of the stockholders’ assessment of the firm’s impending returns (Burch, 2019). The
payout ratio estimates the rate of earnings disbursed in the form of cash dividends, and this is
usually calculated in terms of a percentage. Stockholders, specialists use Price-earnings ratio,
analysts, and investors to determine the proportional value of a company's shares in the apples-
to-apples assessment. Therefore, P-E can also be used to relate a corporation against its record to
compare collective markets against one another or over time (Burch, 2019).
Return on common shareholder's equity
Return on Shareholders’ Equity is the measure of the actual amount of capital provided
by common shareholders plus the money reinvested in the form of retained earnings. These
capital finances assets that provide the base for the return in the numerator. Other things being
equal, copious amounts of capital should result in massive amounts of earnings. On the other
hand, the denominator of earnings per common shares is the weighted average figure of common
shares outstanding. The number of shares outstanding is not a meaningful measure of the capital
provided by the common shareholders (Burch, 2019). Firms tend to change the figure of
common shares outstanding by way of stock dividends, stock splits, reverse stock splits,
repurchases of treasury stock, and other transactions and events.

FINANCIAL ACCOUNTING 3
Return on Assets
Return on Assets (ROA) is an indicator of the profit made by the company. This can be
analyzed through the measure of the net profits generated by the company’s total assets
throughout the financial year by relating the net earnings to the average of total assets. The
reason for using the return on assets is because it measures how efficient the company could
control its assets to produce profits during the financial year (Beers, 2019). Some of the
companies are assets incentives meaning that they are more focused on investing in assets. This
ratio helps both management teams and the company's shareholders to see how well a company
can transfer its investment from assets to profit. For instance, if the company earns a profit that is
equal to the net assets then it means that the company has depleted the amount invested
maximally. This shows that the company has a 100% return on assets ratio, which means the
company has rm1 gain when they have invested rm1 in the company. Return on assets can also
be used in deducting the borrowing interest (Beers, 2019).
Dividends
The term dividend is used to indicate the part of the earnings of a company which is to be
dispersed amongst its shareholders. It may, therefore, be well-defined as the return that
shareholders will get from the company, out of its gains, on his shareholdings. The dividend can
also be the distribution of part of the incomes of the company to its equity shareholders (Isidore
& Christie, 2018). Nevertheless, the board of directors of the company has to decide the dividend
amount to be paid out to the shareholders. Typically, dividends are quantified as the sum each of
the equity shares gets. However, dividends can as well be specified in terms of a percentage.