Return on Equity (ROE)
Return on equity, also known as ROE, is a measure of a company’s financial performance that is determined by dividing net revenue by the total amount of stock owned by stakeholders. ROE is commonly referred to as the return on net assets since shareholders’ equity is believed to be equivalent to a firm’s assets after subtracting its debt. ROE of a company is commonly used as a measurement of both its profitability and the effectiveness with which it generates profits. The higher the return on equity, the more effectively the leadership of a corporation generates earnings and expansion from the equity investment it receives. Returns between 15 to 20% are regarded as satisfactory for a business. Tesla’s ROE for the financial year 2021 stood at 17.47% against that of General Motors (GM) (14.95%), indicating that Tesla garners more streams of income from its equity financing than GM.
Return on Assets (ROA)
Return on assets, often known as ROA, is a financial metric that measures how lucrative a firm is compared to its total assets. ROA can be used by company governance, consultants, and shareholders to measure how effectively a business utilizes its assets to make a profit for the business. The indicator is typically presented as a percentage, with the firm’s net earnings and aggregate assets serving as the inputs. A greater ROA of 8.82% during the financial year 2021 implies Tesla Motors is more effective and successful in handling its assets and liabilities to create profits than GM, whereas the lower ROA of GM suggests space for enhancement for the firm. ROA for public firms can vary significantly and is heavily reliant on the sector in which they operate; hence, the ROA for a technology firm would not automatically equate to that of a business specializing in food and drinks.
Profit Margin
The profit margin is one of the various profitability ratios utilized to determine the extent to which a firm or an operation in the corporate environment generates revenue. It indicates what proportion of total revenue has been converted into net income. Broadly expressed, the proportion figure illustrates, in simple terms, how many cents of earnings the firm has made for each dollar of sales. For instance, if a company declares that it was capable of achieving a profit margin of 45% during the most recent reporting period, this indicates that the company made operating earnings of $0.45 for every dollar of sales it produced. Tesla and GM achieved a profit margin of 10.25% and 7.75%, respectively; they had a net income of 0.1025 and 0.075 for each dollar of sales made. Consequently, Tesla generated more revenue during the financial year 2021 than GM, indicating that its profitability ratio is better than GM’s. Nonetheless, it most generally alludes to a corporation’s net profit margin, which is the company’s bottom line after all other expenditures, such as taxes and one-time quirks, have been subtracted from revenue.
Asset Turnover
The asset turnover ratio is a measurement that compares the value of a company’s sales or revenues to the value of the company’s assets. The asset turnover ratio is a valuable metric that can determine how well a firm puts its assets to work to create income for the business. When the asset turnover ratio of a company is higher, it indicates that the company is more effective at turning its assets into revenue. In the retail industry, an asset turnover ratio of 2.5 or higher could be regarded as satisfactory, but since the two firms operate in the technology sectors, they are more likely to strive for a ratio between 0.25 and 0.5. The above statement is true, as Tesla had an asset turnover of 0.87 against GM’s 0.52. That would imply that Tesla is more profitable than GM in generating income from its assets, operating more efficiently, and effectively using its available cash.
Equity Multiplier (EM)
The equity multiplier (EM) is a warning signal that gauges the proportion of a corporation’s assets that are funded by equity as opposed to debt. It is computed by dividing the total asset value of an institution by the entire stockholders’ equity. Investors generally seek out organizations with a low EM, as this suggests that the business provides more capital and less borrowing to fund the acquisition of assets. Organizations with a substantial debt load may be monetarily dangerous.
The high EM of 3.72 exhibited by General Motors for the financial year 2021 suggests that the corporation finances its assets with significant debt. However, this assumption does not apply to all businesses. Occasionally, a high EM represents an institution’s approach that makes it more productive and enables it to acquire assets at a lower price. On the other hand, the low equity multiplier of 1.97 for Tesla Motors for financial 2021 indicates that the firm relies less on debt. Generally, having a low EM by Tesla Motors reveals that the company is not financing its assets with excessive debt. Instead, the corporation issues stock to fund the acquisition of assets needed to run the company and increase cash flow.