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)