Capsim Success Measures

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Capsim Success Measures

RETURN

ON

EQUITY

(ROE)

Formula

Description:

Return on equity (ROE) is net profit divided by total equity.

What Does Return

On Equity Tell

You?

Return on equity tells you how effectively a company is using the 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

ON

ASSETS

(ROA)

Formula

Description:

You determine return on assets by dividing net profit by your total asset base.

What Does Return

On Assets Tell

You?

Return on assets is an efficiency ratio. It compares the profits generated with the 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

ON

SALES

(ROS)

Formula

Description:

What Does Return

On Sales Tell

You?

You determine return on sales by dividing net profit by net sales.

Since return on sales (ROS) gives the analyst an idea of the profit margin on a 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

TURN

OVER

(T/O)

Formula

Description:

What Does Asset

Turnover Tell

You?

Asset turnover is derived by dividing period sales by average total assets.

Asset turnover tells an analyst more about volume of sales than it does about 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-

ULATIVE

PROFITS

Formula

Description:

Cumulative Profits is the total of all year's Net Profit.

What Does

Cumulative

Profits Tell

You?

How Profitable the company has been over time

MARKET

SHARE

BY

DOLLAR

VOLUME

Formula

Description:

Percentage share of industry sales dollars.

What Does Market

Share in

Dollars Tell

You?

What portion of total industry sales a company has captured.

STOCK

PRICE

Formula

Description:

Stock Price is a function of book value, EPS, and average dividend.

What Does

Stock Price

Tell You?

This is an indication of the value independent investors believe you shares possess.

MARKET

CAP

Formula

Description:

What Does Market

Cap Tell You?

Market Capitalization is calculated by determining the weighted average number of shares for a given period and then multiplying that number by the closing Stock Price.

The recognition that Market Cap is a 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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