Question

What are steps used to calculate the ROA and PE ratios. Are these measures affected by market conditions?

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Answer 1

Answer- ROA is the profitability ratio and it provides how much net income is generated from the assets of the company. The higher the ROA the more efficient the company is in managing the assets in generating the higher net income.

There are two ways to calculate the ROA

ROA = Net income / Average total assets
ROA = ( Net income / sales ) x ( sales / assets)

Average assets differs from company to company. They include land or equipment, inventory changes and buying or selling of vehicles.

Net income is the profit that is generated by revenue less operating expenses less depreciation and amortization and interest expense and taxes.

The P/E ratio is the ratio of price per share ( P) and the earnings per share (EPS)

This Price per share is the market price per share and the EPS is the earnings that is generated per value of share. The P/E ratio is the most common price multiples that is used to in the industry and is very easy to calculate.

Both the measures ROA and P/E are affected by the market conditions
The change in net income generated every year and assets also changes with new investments in assets in which changes the ROA.
The change in the Price of the share depends on the performance of the company and during the downturn of economy or the bad performance of the company lower the sales of company or investing in non profitable projects the performance gets impacted and there is change in price and earnings of the company. The boom in the economy and industry also changes the price and earnings of the company.