Financial Returns and Capital Constraints
JPMorgan Chase is undoubtedly the largest banking institution in the U.S and sixth largest globally in terms of revenues and operational branches. Headquartered in New York City, JPMorgan Chase has more than 16, 000 ATMs distributed among its 5,100 nationwide branches. It aspires to superbly execute, build a great team and a winning culture. The company’s mission is to be the world’s number one financial institution. According to the Financials- J.P. Morgan Asset Management. (2020)The organization’s net income is expected to grow significantly from $36.54 billion in 2019. The company’s Exchange Traded Funds, and Mutual Funds products accounted for close to 22% of total sales. However, the organization has turned its attention on technology to enhance its competitive advantage in the highly competitive sector. The company’s value is expected to grow by 5% by the year 2021.
Calculate the Return on Equity (ROE) using the DuPont System
Return on Equity (ROE) is often used to measure the effectiveness of a company’s management of assets to generate profits (Hargrave, 2019). A consideration of JPMorgan Chase’s return on equity reveals a consistent yearly growth. The profit margin has maintained a consistent trend, as well. However, there have been a lot of fluctuations in the company’s asset turnover. Calculating the ROE for JPMorgan Chase involves the use of a specific formula, which is all about the quotient of Net Income less the preferred paid dividends divided by the average of total equity attributed to stakeholders over a given period of time. For the bank, the annual-based net income as a result of the shareholder for the last quarter in 2019 was USD 21,666 million. The company’s total shareholder equity for the same quarter was $75,850. Therefore, JPMorgan Chase’s annual-based ROE for the last quarter of 2019 was 35.25%
Calculating the CGSV and comparing it to the Current Stock Price
The shareholders often rely on Constant Growth Stock Valuation (CGSV to determine the amount they should invest in order to get the anticipated return after elapse of every fiscal period. Good performances always lead to greater stock for the stockholder. The formula used in the calculation of CGSV is P0 = D0 (1+g)/r-g = D1 /r-g, where the P0 is the stock price, D0 being the current dividend while the D1 is the next dividend. Also, the g is the rate of growth and r being the required return on investment. Substituting the data for JPMorgan Chase, we end up with the following;
P0 = 2.4 (1+ 0.2511)/0.2320-0.2511=1.01/0.2320-0.2511
2.88/.0008=1.01/.0008
3600 = 1262.50
P0= 2337.50
=$2337.50
The above shows that getting a 35.25% return would mean paying less than $2337.50. The company’s current rate is $101.35. Purchasing the stock today means the shareholder would be getting the above return.
JPMorgan Chase Industry Evaluation and the Types of Capital Constraints
The return on investment shows that the company is effective when it comes to converting capital into profits. JPMorgan Chase’s return on capital is 35.25%, a clear indication that the company is above the standards of the industry. The organization’s ability to convert capital into profit indicates the highest level of efficiency. Also, the debt-equity for the organization from 2016, 2017, and 2018 is 1.95%, 1.90%, and 2.01, respectively. This is an average place to be in considering that debt to equity ratio indicates the ability of the organization to service its debts using the shareholder equity. A high ratio means an organization is in a good position to finance its growth and vice versa (Hickman, Byrd, & McPherson, 2013).
References
Hargrave, M. (2019). Return on equity. Retrieved from Investopedia: https://www.investopedia.com/terms/r/returnonequity.asp
Hickman, K. A., Byrd, J. W., & McPherson, M. (2013). Essentials of finance. Retrieved from https://content.ashford.edu/
Financials J.P. Morgan Asset Management. (2020). Retrieved 20 July 2020, from https://am.jpmorgan.com/us/en/asset-management/gim/adv/financials