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Company
In this case, the following metrics that were given may help (1) Price Earnings
Ratio or PE ratio, (2) EPS growth rate, and (3) return metrics - ROA and ROE.
Return on Assets
Return on Assets is a type of return on investment (ROI) metric that measures the
profitability of a business in relation to its assets. The return on asset trend rate for the
MBI corporation was -1% from 1995 to 1996 and -2% from 1996 to 1997. From 1995 to
1997, MBI's business saw an overall trend rate of -2%. Despite the fact that the return
on assets ratio, which is a bad rate, is heading downward, the company is still
successfully managing its assets to generate greater amounts of net income with an
average return on assets rate of 19.33%. Since a return on assets of over 5% is
generally seen as good and over 20% as excellent. Therefore, purchasing MBI common
stock is encouraged.
Return on Equity
The price Earning Ratio is the relationship between a company’s stock price and
earnings per share (EPS). It gives the investors a better sense of the value of the
company to determine whether a stock is overvalued or undervalued. The MBI's price-
to-earnings ratio trend rate is -1% from 1995 to 1996 but increases to 2% in 1996 and
1997; the MBI's average trend rate is 1% from 1995 to 1997. This implies that MBI
Corporation's average price-to-earnings ratio is 13.40, compared to the industry
average of 14.3. MBI's price-to-earnings ratio is reasonable. However, this may indicate
that the company's current market price is undervalued.
The earnings per share growth rate is to analyze the company's profitability per
outstanding share of common stock after deducting dividends earned during the year. It
also illustrates the stability of the company's growth. The EPS growth rate patterns for
the MBI Corporation are very slow in 1995–1996 at 1% before growing by 3% in 1996–
1997. Earnings per share increased on average by 7% from 1995 and 1997., with a 1%
overall trend. Although the three-year average of profits per share growth rate and the
price-earnings ratio is lower than the industry average, both are currently bouncing back
from 19x6 to 19x7. This could mean that the company is expanding and generating
more value.
Decision
As the chief investment officer, I intend to purchase MBI Common stock but only
for the short term. The analysis of profitability ratios demonstrates that the
company may currently be in good shape, but the declining ROA and ROE tendency
may make long-term investments risky. Based on its price-earnings ratio, we may claim
that the company's current share price is undervalued. Thus the value of its shares is
predicted to rise, and we intend to sell the stock at a higher price within the year. The
EPS growth rate may be declining, but as long as it is not negative, we can still buy
common stock in the short term. Positive growth still implies an increase in the current
market price. The company's EPS has been lower than the industry average for past
years, and its current return on equity is lower than the industry average. Instead of MBI
shares, we will use the opportunity to purchase competitor shares for the long term.