Individual Research Activity 3

Individual Research Activity 3
214821714
CSHR1090
1
Summary of Information
Bank Software Company
PE 11x earning 80x earning
(known as market measures)
Dividend yield 3%
Return on assets 2.7% 1.8%
Return on common 10.2% 2%
shareholders’ equity
Questions:
1. Research and find the meaning of the bolded and underlined terms. Include this in your
response.
Price-earning ratio: It’s the measurement of the relationship between market price per share
and earning per share. A higher ratio may indicate to investor to expect a higher profitability in
the future, while a lower ratio will indicate less profitability.
Return on common shareholder’s equity: This ratio measures overall profitability of

shareholder’s investment. In simpler terms, it compares their initial investments with how much
money they receive from the company. A higher ratio indicates that more money is being
returned to investors, which can also indicate a good performance of the company.
Return on assets: Return on assets is a profitability ratio that measure total profitability of a
business in relation to its assets. In other words, it is a measure of how efficiently a company can
use the assets they own to generate profits. A higher ratio can mean that the company has been
efficient and productive at managing its balance sheets to generate profits. On the other hand, a
lower ratio indicates that the usage of assets has not been so productive. This measure is used by
investors to get an idea of how effective the company can turn its investments into net income.
Dividends: The distribution of company profits to eligible shareholders. Typically, this amount
is calculated from a company’s retained earnings. These come in form of regular payments of
profits made to investors who own a company stock. When a company makes profit, they are
able to pay a proportion of profit as a dividend to shareholders.
Dividend Yields: Dividend yield measures the rate of return earn from dividends during the
year. It is a financial ratio that can tell you the percentage of a company’s share price it pays out
to its shareholders each year. It can also help investors evaluate the potential profit for every
dollar they invest or judge the riskiness of investing in a particular company. A high dividend
yield can indicate a good sign to investors that a seeking dividend income while a low one is
preferable by investors seeking price appreciation. However, a very high rate may signal
riskiness. When comparing, strong yields normally range between 2 and 6 percent.
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2. Why would the price-earnings ratio be higher for the software company? (3 marks)
A higher PE ratio is an indication that investors are willing to pay a higher value to buy a share
because the price are expected to grow in the future. In general, all software/technology company
are viewed as having high growth due to their constant high demands. With constants updates
and/or advancements of various software, these companies are growing faster than average due
to high demands.
3. Why would the bank have dividend yield and the software company would not? (3
marks)
Dividends are a way for companies to share the profits that the company makes with
shareholders to keep them invested in the business. These shareholders expect profits return to
them, however not all companies pay dividends. While more mature and stable companies, like
bank institutions, make enough profits and have a good return on assets in comparison to pay out
dividends, other growing companies may retain their profit and use them to invest back in their
business to attempting to grow even more.
4. Why would the software company have lower returns on both assets and equity? (3
marks)
Most company assets are funded by debts or company’s equity. The ROA for public companies,
such as a tech one, highly depends on the industry in which it functions in and therefore, it won’t
necessarily have the same rates as the banks. The assets in the bank’s balance sheets have better
representations on the real value of their assets and liabilities because their carried out at market
value rather than historical costs that software companies use. Also, the software hasn’t had
many sales yet, since it is still developing, and therefore, as a result, the software companies is
bound to have lower return rates for now.
5. Why would a bank have such a large difference between its return on common
shareholders’ equity and return on assets? (3 marks)
According to the definitions, return on common shareholders’ equity ratio measures overall
profitability of the shareholder’s investment, whereas return on assets measures total profitability
of a business in relation to its assets. The ROE helps investors measure how their investments are
generating income, while ROA helps investors measure how management is using its assets or
resources to generate more income. The reason that the banks have a huge difference between
them is because initially banks borrow capital in order to lend to their customers. Therefore, they
are not using their own money, but the money that shareholders invest with. All the money that
is deposited in chequing accounts normally are meant to circulate in the system to use to lend to
others. A high ROE indicates that the bank is effectively using the contributions of its
shareholders to generate profits.
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6. Which company would you invest in? Explain your reasoning. (5 marks)
After analyzing all the information provided, I would most probably decide to invest in the large
bank, even though it has a higher PE Ratio.
First of all, the bank shows overall consistency. On the other hand, the tech company is a
developing company and even though it shows the potential to grow, you cannot be too sure
about the future.
Second, the bank also has a larger return on both assets and shareholders’ equity, which indicates
a better performance overall when comparing them. According to the chart, the shareholder’s
equity is 10.2 percent, which means ten times the initial investments is being earned. This also
signifies an opportunity of further potential growth.
Also, unlike the tech company, the bank pays out dividends. A dividend yield shows how much a
company pays its shareholder in relation to its share prices. An ideal yield rate is between 2 and
6 percent. According to the chart, the bank pays out 3 percent, which is considered not too high
to be considered risky nor to low that it might not be worth investing in it.

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Return on common shareholder’s equity: This ratio measures overall profitability of

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