Managerial Finance: ROE and Market Value Ratio Analysis

Running head: MANAGERIAL FINANCE
Managerial finance
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1MANAGERIAL FINANCE
Table of Contents
Introduction................................................................................................................................2
Return on equity (ROE).............................................................................................................2
Market value ratio......................................................................................................................3
Conclusion..................................................................................................................................4
Reference....................................................................................................................................5

2MANAGERIAL FINANCE
Introduction
ROE is a financial performance metric used to measure rate of return that owners of
the common stock of any entity receive on the shareholding. On the other hand, market value
ratios are used for analysing the current share price of the company. These ratios are
generally used by the potential investor for determining whether the share of a company is
overpriced or underpriced (Lee et al., 2015).
Return on equity (ROE)
ROE signifies how good the entity is in context of generating the returns on
investment received by it from its shareholders. It is calculated through dividing net earnings
by the shareholder’s equity. DuPont analysis is the extended form of ROE of any entity that
analyses the net profit margin, assets turnover and equity ratio that is financial leverage. To
be more specific the DuPont analysis breaks down ROE for analyzing how the company can
enhance the return for its shareholders (Benjamin, Mohamed & Marathamuthu, 2018). It
provides broader view regarding the strengths of the company and highlights the area where
improvement scope is there. It is calculated as follows –
ROE = Net profit margin * Asset turnover / equity ratio
Or, = (Earnings to owners / revenues) * (Revenues / assets) / (Common equity / assets)
Or, = Earnings to owners / common equity
ROE for American Airlines