FS 6 PE ratio and return on equity

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Apr 3, 2024

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Ratio analysis 6 (10 points) Name: Shawna Ye Ratios: return on common stockholder’s equity and price-earnings ratio You will use the NIKE financial statements in appendix C for these ratios The formula for return on stockholder’s equity = net income average total stockholder’s equity Average total stockholder’s equity is the sum of the beginning and ending total stockholder’s equity added together and then divided by 2. The beginning stockholder’s equity for 5/31/18 is the ending equity for 5/31/17. The beginning stockholder’s equity for 5/31/17 is 12,258. The ratio is expressed at a percentage. Round the average stockholder’s equity to the nearest tenth before diving into net income. Round the ratio to the nearest tenth of a percent. 5/31/18 ratio Net income: $1,933 Avg Total Stockholder’s equity = ($12,407 + $9,812) / 2 = $11,109.5 Return on stockholder’s equity = $1,933 / $11,109.5 = 17.40% 5/31/17 ratio Net income: $4,240 Avg Total Stockholder’s equity = ($12,258 + $12,407) / 2 = $12,332.5 Return on stockholder’s equity = $4,240 / $12,332.5 = 34.38% This ratio measures the rate of income earned on the amount invested by the stockholders. Calculate both ratios and comment on NIKEs profitability between the two years Nike’s return on stockholder’s equity has decreased dramatically from 2017 to 2018. This may tell us that Nike’s is not using their stockholder’s equity as efficiently in 2018 as they did in 2017. Since the main difference between the numbers seems to be the
significantly lower net income in 2018, we can conclude that Nike is either not generating as much revenue or has significantly increased their operating cost. ------------------------------------------------------------------------------------------------------------------------------------------ The formula for price-earnings ratio is: Market price per share of common stock Earnings per share on common stock This ratio measures the company’s future earnings prospects. The market price per share was 72.12 for 5/31/18 and 53.06 for 5/31/17. Use the basic earnings per share from the consolidated statements of income for the denominator. Round the ratio to the nearest tenth. 5/31/18 ratio MP: $72.12 EPS: $1.19 PE Ratio = $72.12 / $1.19 = 60.61 5/31/17 ratio MP: $53.06 EPS: $2.56 PE Ratio = $53.06 / $2.56 = 20.73 Calculate both ratios and comment on NIKEs profitability between the two years Nike’s price-earnings ratio increases dramatically from 2017 to 2018. This may be telling us that Nike’s stock prices are either overvalued in 2018 or that investors are expecting Nike to grow significantly more in the future.
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