How to Calculate a Company Return
Profitability can be calculated several ways. Return on equity (ROE) and return on assets (ROA) are among the most popular methods to measure profitability from an accounting standpoint. These ratios rely on information that is found in a company's financial statements, and indicate how well the company uses its assets and how effectively it operates. Another set of measurements is based on market information, more specifically, on stock prices, risk indicators and probabilities. These measurements gauge the return on a company's stock. You should choose the appropriate method based on the purpose of your calculations.
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Instructions
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Accounting Returns and Earnings per Share
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Calculate ROA. Look up the net income figure in the income statement, and the total assets figure in the balance sheet. To find the ROA, divide the net income by total assets. The result is the profit-per-dollar worth of assets.
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Calculate ROE. Look up net income in the income statement, and shareholders' equity in the balance sheet. To calculate ROE, divide the net income by total equity. The result is the profit-per-dollar worth of equity, and is frequently called "return on net worth." It is normal for ROE to be higher than ROA; it simply indicates that the company is borrowing money to raise capital.
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Find earnings per share (EPS). Look up the net income figure in the income statement. Find the amount of outstanding shares. Divide net income by the number of outstanding shares to arrive at the EPS figure. Another option is to use the Yahoo! Finance website to look up the company report; it contains the EPS figure already.
Calculating the Expected Return Using Capital Asset Pricing Model
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Find the beta of the given company's stock. Visit the Morningstar or Yahoo! Finance website, and search for the information about the stock in question. In the report, find the risk section and note the value of beta, the measure of systematic risk.
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Determine the risk-free rate. The risk-free rate is an estimate of a rate of the riskless or extremely low risk investment. Generally, the current rate on Treasury bills is used as a risk-free rate. You can find the current T-bill rate on www.bankrate.com.
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Calculate the market risk premium. First, use the earnings model to find the required return: divide EPS by stock price. You can find both EPS and stock price values on the Morningstar or Yahoo! Finance website. Subtract the risk-free rate from the required return to find the risk premium.
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Calculate the company return. Use the capital asset pricing model (CAPM) formula to calculate return: multiply the market risk premium value by beta and add the product to the risk-free rate.
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