Suppose you want to invest your excess funds in an existing bedding business, how do you know if a business is profitable and able to provide you with the desired return on your investment?
The main objectives of most enterprises are: (1) obtaining a satisfactory return on investment in accordance with (2) maintaining a reasonable financial position. To determine whether these goals are met, we will first need to determine the return of the word and decide how to measure it.
Return means profit for a certain period. In the income statement this is shown as net income.
The next step is to determine the funds invested. This phrase can be used as (1) funds invested by shareholders, or (2) funds invested by long-term creditors, as well as shareholders.
It will be interesting to us to study the income received from the funds invested by shareholders. The relevant term for the development of these funds may be the shareholders of the investment.
To determine the total shareholders' investments in a corporation, would we need to summarize three categories of balance sheet items?
(1) Estimated value of outstanding reserves
(2) Retained earnings
(3) Capital balance (changes in equity not related to receipt or dividends)
For example, Quilts & Shams Enterprise financial reports show the following accounting information:
(1) Ordinary shares (50,000 shares outstanding) in the amount of US $ 600,000 in 2008 and
$ 600,000 in 2009;
(2) Retained earnings were $ 700,000 in 2008 and $ 600,000 in 2009;
(3) Shareholders & # 39; December investments were $ 1.3 million ($ 600,000 + $ 700,000)
December 31, 2008 and $ 1.2 million. United States ($ 600,000 + $ 600,000) December 31, 2009;
(4) The return was $ 200,000 for 2009.
Shareholders & # 39; investments amounted to $ 2.5 million ($ 1.3 million + $ 1.2 million). Therefore, the average number of shareholders investments in 2009 amounted to $ 1.25 million ($ 2.5 million / 2).
The measure of return on equity investment is obtained by dividing the yield (net profit) by the average amount of shareholders # 39; investment for the period and the expression of the result in percent Thus, the shareholder return on investment by Quilts & Shams Enterprise in 2009 was 16% ($ 200,000 / $ 1.25 million).
The average return to shareholders of investments for profitable American corporations is about 10%. Shareholder returns; Quilt & Shams Enterprise investments were higher than this.
Return on stockholders investment is one of the main indicators of the company's performance. Individuals who study financial statements to decide where to invest their funds often use other general ratios.
One of them is earnings per share. As the name suggests, this ratio is simply the total income for a given period divided by the number of shares outstanding.
We already know that the profit of Quilts & Shams Enterprise in 2009 was $ 200,000. The number of shares outstanding during 2008 was 50,000. Thus, earnings per share were $ 4 ($ 200,000 / $ 50,000).
Two of the many factors useful in financial analysis are: (1) the return on investment in stocks and (2) earnings per share.
The key issue is that the winning investor should be: how much profit for the current quarter per share (in percent) compared to the same quarter last year? Many successful investors use a 25% or 30% minimum profit margin.
