Ratios

Ratios

Profit Margin (Net Margin)

Net Income divided by Revenues

Also known as Net Profit Margin

Gross Margin

Sales margins are often called gross profit margins

Return On Assets - ROA (return on investment)

The ROA is often referred to as ROI

The assets of the company are comprised of both debt and equity.

Note: Some investors add interest expense back into net income when performing this calculation because they'd like to use operating returns before cost of borrowing.

Return On Capital Employed - ROCE

ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.

A variation of this ratio is return on average capital employed (ROACE)

Return On Equity - ROE

Return on Equity = Net Income/Shareholder's Equity

return on common equity (ROCE) = net income - preferred dividends / common equity

dividing net income byaverage shareholders' equity

Shareholder's equity does not include preferred shares.

• If new shares are issued then use the weighted average of the number of shares throughout the year.
• Averaging ROE over the past 5 to 10 years can give you a better idea of the historical growth.

Also known as "return on net worth" (RONW)

Pareto Analysis

Pareto Analysis

A technique used for decision making based on the Pareto Principle, known as the 80/20 rule. It is a decision-making technique that statistically separates a limited number of input factors as having the greatest impact on an outcome, either desirable or undesirable. Pareto analysis is based on the idea that 80% of a project's benefit can be achieved by doing 20% of the work or conversely 80% of problems are traced to 20% of the causes.

In its simplest terms, Pareto analysis will typically show that a disproportionate improvement can be achieved by ranking various causes of a problem and by concentrating on those solutions or items with the largest impact. The basic premise is that not all inputs have the same or even proportional impact on a given output. This type of decision-making can be used in many fields of endeavor, from government policy to individual business decisions.