methods of improving investor return

10.2 Analysis of Published Accounts – Investment Ratios 📈

Investment ratios help investors decide whether a company is a good place to put their money. They show how well a firm uses its assets to generate profit and how much return shareholders can expect. Think of it as a financial “health check” for a business.

Key Investment Ratios

RatioFormulaWhat It Tells You
Return on Assets (ROA)\$ \displaystyle \text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \$Shows how efficiently a company turns its assets into profit.
Return on Equity (ROE)\$ \displaystyle \text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \$Measures how much profit a company generates with the money invested by shareholders.
Dividend Yield\$ \displaystyle \text{Dividend Yield} = \frac{\text{Dividend per Share}}{\text{Share Price}} \$Shows the cash return investors receive relative to the share price.
Earnings Per Share (EPS)\$ \displaystyle \text{EPS} = \frac{\text{Net Income} - \text{Dividends on Preferred Stock}}{\text{Average Outstanding Shares}} \$Indicates how much profit is allocated to each share of common stock.

How to Improve Investor Return 💡

Improving investor return is like upgrading a bicycle: you can make it faster, more efficient, and more fun to ride. Here are the main ways companies can boost returns:

  1. Increase Profitability – Cut costs, raise prices, or launch new products. Think of it as adding extra toppings to a pizza that customers love.

  2. Reduce Cost of Capital – Lower interest rates on loans or issue cheaper equity. It’s like getting a better deal on a car loan.

  3. Improve Asset Utilisation – Use existing assets more effectively (e.g., faster inventory turnover). Imagine a factory that can produce more toys with the same machines.

  4. Enhance Dividend Policy – Offer attractive dividends or buy back shares to increase shareholder value.

  5. Strategic Growth – Expand into new markets or acquire competitors. It’s like moving from a small lemonade stand to a full‑fledged juice bar.

Exam Tips for 10.2 📚

Remember:

  • Show all calculations clearly – teachers love to see your working.

  • Use the correct formula names and units.

  • Explain what each ratio tells you in plain English.

  • When asked to suggest improvements, link the ratio to a specific action (e.g., low ROA → improve asset utilisation).

  • Practice with past exam questions to get comfortable with the format.

Practice Question 🚀

Company X has a net income of £120,000, total assets of £600,000, and shareholders' equity of £300,000. Calculate:

  1. Return on Assets (ROA)

  2. Return on Equity (ROE)

Then, suggest one way the company could improve its ROE.

Answer:

1. ROA = £120,000 ÷ £600,000 = 0.20 or 20%

2. ROE = £120,000 ÷ £300,000 = 0.40 or 40%

Improvement suggestion: Increase asset utilisation by reducing inventory levels, which would raise ROA and, consequently, ROE.