Financial Ratios
Profitability Ratios
Profitability ratios associate the amount of income earned with the resources used to generate it.
Return on Assets relates net income to the investment in all the financial resources at the command of management. It is most useful as a measure of effective resource utilisation without regard to how those resources were obtained or financed. Analysts and investors often compare the ROA of one company to the ROA of its peer group of key competitors to assess the effectiveness of top management.
ROA = Net Income / Total Assets
Return on Equity relates net income to the amount invested by shareholders. It is a measure of how efficiently the share-holders' stake in the business has been used. ROE is calculated as follows:
ROE = Net Income / Shareholders Equity.
Return on Investment is often used in business discussions that involve profitability. Unfortunately there is no standard definition of ROI, since investment may be construed from many perspectives. Investment might represent the assets committed to a particular activity, the shareholders equity involved, or invested assets minus any liabilities generated by a company taking on a project. So, when someone uses the term "return on investment" always get a clarification. Ask "how are you calculating investment?"
The earnings before interest and taxes margin (EBIT margin) more generally known as the operating margin, is used by many analysts to gauge the profitability of a company's operating activities. The operating margin removes from the equation the interest expenses and taxes over which current management may have no control, thus giving a clearer indicator of management performance. To calculate the operating margin, use this formula:
Operating Margin = EBIT / Net Sales
Corporations generally have many owners, not all of whom own an equal...
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