Capsim Success Measures RETURN Formula Return on equity (ROE) is net profit ON Description: divided by total equity. EQUITY (ROE) What Does Return Return on equity tells you how On Equity Tell effectively a company is using the You? dollars invested in it by stockholders. ROE is the most often quoted single statistic when describing a firm's performance. It is also one of the statistics considered to be most useful by stockholders. RETURN Formula You determine return on assets by dividing ON Description: net profit by your total asset base. ASSETS (ROA) What Does Return Return on assets is an efficiency ratio. It On Assets Tell compares the profits generated with the You? asset base required. It answers the question, how hard are you working your assets? There is an economic opportunity cost notion associated with this ratio. An operating manager may be challenged with how a dollar spent on assets might do compared with a dollar invested in some other area (e.g., a bank account), or how the ROA compares with the interest a firm is paying on the money borrowed to pay for the asset. RETURN Formula You determine return on sales by dividing ON Description: net profit by net sales. SALES What Does Return Since return on sales (ROS) gives the (ROS) On Sales Tell analyst an idea of the profit margin on a You? product, this ratio can reveal a great deal about product positioning and pricing policies. For example, a high ROS suggests premium pricing. This suggests the product will not be aimed at a commodity market. ROS is also a good indicator of demand and supply within the industry. The more competitive an industry, the more pressure there is on price and subsequently ROS falls. For example, the ROS of the airline industry has been low due to intense competition in the last few years. ASSET Formula Asset turnover is derived by dividing period TURN Description: sales by average total assets. OVER What Does Asset Asset turnover tells an analyst more about (T/O) Turnover Tell volume of sales than it does about You? profitability (the numerator is a top line number on the income statement, not a bottom line number). Asset turnover (T/O) demonstrates how effective the asset base is in generating top line revenue. High T/O values have implications in terms of plant structure, level of backward integration, and aggressiveness of pricing policy. CUM- Formula Cumulative Profits is the total of ULATIVE Description: all year's Net Profit. PROFITS What Does How Profitable the company Cumulative has been over time Profits Tell You? MARKET Formula Percentage share of industry sales SHARE Description: dollars. BY DOLLAR VOLUME What Does Market What portion of total industry sales a Share in company has captured. Dollars Tell You? STOCK Formula Stock Price is a function of book PRICE Description: value, EPS, and average dividend. What Does This is an indication of the value Stock Price independent investors believe Tell You? you shares possess. MARKET Formula Market Capitalization is calculated by CAP Description: determining the weighted average number of shares for a given period and then multiplying that number by the closing Stock Price. What Does Market The recognition that Market Cap is a Cap Tell You? function of both share price and share volume is significant for this number tells you more about the real value of the company than just the share price alone. In the extreme a corporation could be trading at a huge P/E multiple but if it only had relatively few shares outstanding then the company would not be worth as much as a company that was trading at a relatively poor multiple but had a large number of shares outstanding. Market Cap is the truest indication of the markets estimate of a company's worth.
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