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Expanding and investing in projects overseas

Expanding and investing in projects overseas with focuses on ROE, IRR, and ROI

How is return on equity (ROE) defined and what is the importance of understanding the return on equity (ROE) as it applies to international financing? What would the strengths and weaknesses be?

How is internal rate of return (IRR) defined and what is the importance of understanding the internal rate of return (IRR) as it applies to international financing? What would the strengths and weaknesses be?

When selecting two companies from the same industry and using the most current annual report information available on the company's website how is the ROE computed for each?

When selecting the same two companies from the same industry and using the most current annual report information available on the company's website how is the ROI computed for each?

How can the ROE and the ROI of these companies be compared and described?

The objective is to understand the forces of globalization and its implications for the multinational firm and to recognize financial management decisions of multinational firms.

Solution Preview

I recommend you use the attached files vs this"cut and paste" version. The excell table is better formatted and you will be able to see the formulas. This solution has 9 references and includes an additional (similar) firm on the comparison. Be sure to open both attachments.

Return on Equity (ROE) - Definition and advantages

According to Kennon (2009), return on equity (ROE) is a financial profitability instrument that is used to show how much earnings (income) a firm generates as it relates to the sum of investor equity, based on the firms financial fact sheet. STUDENT = KEEP IN MIND THAT SHAREHOLDER EQUITY IS THAT AMOUNT THAT THE SHAREHOLDERS OWN. The firms' total assets, minus the firm's total liabilities equals shareholder equity (total assets - total liabilities = equity). Return on Equity (ROE) uses the company's net income and the shareholders' equity, to grant information on the administration's capacity to generate assets (wealth) for the shareholders (net profit / shareholder's equity = ROE). Therefore, this ratio is a fair indicator of how efficient the firm is administering and managing their finances, where the final goal is to generate income (wealth) for the investor (McClure, 2009). This tool seems to be of good value when evaluating overseas projects to invest in. One could argue that there is a direct relationship between a firm's capacity to generate equity and the investor's returns.

Return on equity ratio (ROE), should not be the sole metric used to determine a firm's financial efficiency. The financial analyst should include other metrics and use other formulas to better evaluate profitability of a firm, and the ability of the firm to generate a good return on investment. The financial analyst should scrutinize ROE along with the firm's financial fact sheet. These financial fact sheets are often made public by an independent financial / consulting agency. This will provide an unbiased (factual) representation of the facts and the investor will be able to see the firms' ability to manage their equity, make a profit, which will allow the investor to establish which firm has the competitive advantage.

The return on equity ratio is a simple guide that will allow the investor to compare similar firms (in the same industry) and further; it will assist in identifying which industry leaders are managing their finances better and generating a better return on equity for the investor. This tool provides good financial insight and is a good starting point for those individuals wanting to invest overseas. Stock market Investors.com recommends that a superior return on equity ratio falls in the range of thirteen to fifteen percent.

Disadvantages of ROE

Unfortunately, there are some disadvantages to the ROE ratio. As stated before, this ratio does not tell the entire story. There are situations where this ratio can be falsely elevated, causing the ROE percent to be inaccurately high. When the firm's assets ...

Solution Summary

Return on equity ratio (ROE), should not be the sole metric used to determine a firm's financial efficiency. The financial analyst should include other metrics and use other formulas to better evaluate profitability of a firm, and the ability of the firm to generate a good return on investment. The financial analyst should scrutinize ROE along with the firm's financial fact sheet. These financial fact sheets are often made public by an independent financial / consulting agency. This will provide an unbiased (factual) representation of the facts and the investor will be able to see the firms' ability to manage their equity, make a profit, which will allow the investor to establish which firm has the competitive advantage.

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