"Return on ..." ratios

Here are the main "Return on ..." ratios, along with their formulas and explanations:

1. Return on Assets (ROA)

Formula: Net Income / Total Assets

Explanation: Return on Assets (ROA) measures how efficiently a company uses its assets to generate profit. It shows how much profit is generated per unit of assets. A higher ROA means the company is using its assets more effectively to produce earnings.

2. Return on Equity (ROE)

Formula: Net Income / Shareholders’ Equity

Explanation: Return on Equity (ROE) measures the profitability relative to shareholders' equity. It shows how much profit a company generates with the money shareholders have invested. A higher ROE indicates more efficient use of shareholders' funds.

3. Return on Investment (ROI)

Formula: (Net Profit − Initial Investment) / Initial Investment

Explanation: Return on Investment (ROI) measures the profitability of an investment by comparing the return generated to the initial cost. It’s a versatile measure, useful in evaluating the efficiency of specific projects, investments, or business ventures.

4. Return on Capital Employed (ROCE)

Formula: Earnings Before Interest and Tax (EBIT) / Capital Employed

• Capital Employed = Total Assets - Current Liabilities or (Total Equity + Non-Current Liabilities)

Explanation: Return on Capital Employed (ROCE) measures a company's profitability and efficiency in using its total capital base, including debt and equity. It provides insights into how well a company generates profit from its capital.

5. Return on Sales (ROS)

Formula: Operating Profit / Net Sales

Explanation: Return on Sales (ROS), also known as Operating Profit Margin, measures the efficiency of a company’s operations by showing the percentage of sales that turn into operating profit. Higher ROS indicates better operational efficiency.

6. Return on Net Assets (RONA)

Formula: Net Income / Net Assets

• Net Assets = Total Assets - Current Liabilities

Explanation: Return on Net Assets (RONA) measures profitability in relation to net assets. This ratio focuses on core operational efficiency by showing how effectively a company generates income from its assets minus its current liabilities.

7. Return on Invested Capital (ROIC)

Formula: Net Operating Profit After Tax (NOPAT) / Invested Capital

• Invested Capital includes both equity and long-term debt.

Explanation: Return on Invested Capital (ROIC) measures the return generated on all capital invested in the business, encompassing both debt and equity. It’s particularly useful for evaluating whether a company is generating returns above its cost of capital.

8. Return on Inventory (Inventory Turnover)

Formula: Gross Profit / Average Inventory

Explanation: This measures how efficiently a company turns inventory into profit. It’s particularly useful for companies in retail and manufacturing sectors, as it assesses the profitability of holding inventory.

9. Return on Equity after Tax (ROE after Tax)

Formula: Net Income after Tax / Shareholders’ Equity

Explanation: Similar to ROE, this ratio focuses specifically on income after tax, providing insight into post-tax returns on shareholders’ equity. It’s a helpful indicator of returns available to shareholders after all tax obligations are met.