Reference no: EM132649402

Analysis of financial ratios and some research from other sources to further your understanding of financial ratios.

You will select an industry and two firms within the industry as described below and analyze the Return on Equity (ROE) of both firms and the market valuation ratios.

1. Data Source: Locating Company and Industry Information Research Guide (Hunt Library) (Links to an external site.)
2. Select 'Key Business Ratios' from the guide menu. 
3. Follow instructions for Mergent Online to generate a report including industry and selected firms.Should include a spreadsheet. This should include your selected firms as well as a summary of the industry's ratios.

Be looking at a number of ratios for a firm and comparing to industry averages.

Focus on one ratio which can actually be calculated using three other ratios. That ratio is the Return on Equity (ROE).

ROE can be calculated in the following manner:

ROE = [net profit margin] x [asset turnover] ÷ [equity ratio]
ROE = [earnings to owners ÷ revenues] x [revenues ÷ assets] ÷ [common equity ÷ assets]
ROE = [earnings to owners ÷ revenues] x [revenues ÷ assets] x [assets ÷ common equity]
Look at what cancels and you are left with:
earnings ÷ equity which is ROE

ROE is comprised of:

Profit Margin (bottom line)
Turnover (asset utilization)
Equity ratio (financial cushion)
A note on equity ratio: (equity/assets):
Say a firm had $100 in assets and $37 dollars in equity;
The equity ratio would be 37/100 or 0.37.

Question 1: What does that mean?

Question 2: How can a firm be financed?

Question 3: How much came from equity (owners)?

Question 4: How much from creditors?