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  • Return On Assets (ROA) : Index of Industrial Production IIP Purchasing Managers' Index PMI

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    Profitability ratios assess a company's ability to generate profits relative to its assets, costs, and equity. Higher ratio results are generally more favorable. Key profitability ratios include return on assets (ROA), return on equity (ROE), and return on capital employed (ROCE). ROA measures net income relative to total assets, ROE measures net income relative to shareholders' equity, and ROCE measures earnings before interest and taxes relative to capital employed. Efficiency ratios measure how efficiently a company uses its assets and liabilities, including receivables turnover, working capital turnover, asset turnover, and fixed asset turnover.

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    Profitability ratios assess a company's ability to generate profits relative to its assets, costs, and equity. Higher ratio results are generally more favorable. Key profitability ratios include return on assets (ROA), return on equity (ROE), and return on capital employed (ROCE). ROA measures net income relative to total assets, ROE measures net income relative to shareholders' equity, and ROCE measures earnings before interest and taxes relative to capital employed. Efficiency ratios measure how efficiently a company uses its assets and liabilities, including receivables turnover, working capital turnover, asset turnover, and fixed asset turnover.

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    44 views4 pages

    Return On Assets (ROA) : Index of Industrial Production IIP Purchasing Managers' Index PMI

    Uploaded by

    Muskan M
    Profitability ratios assess a company's ability to generate profits relative to its assets, costs, and equity. Higher ratio results are generally more favorable. Key profitability ratios include return on assets (ROA), return on equity (ROE), and return on capital employed (ROCE). ROA measures net income relative to total assets, ROE measures net income relative to shareholders' equity, and ROCE measures earnings before interest and taxes relative to capital employed. Efficiency ratios measure how efficiently a company uses its assets and liabilities, including receivables turnover, working capital turnover, asset turnover, and fixed asset turnover.

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    of 4

    Index of Industrial Production IIP

    Purchasing Managers' Index PMI

    Profitability ratios assess a company's ability to earn profits from its sales or
    operations, balance sheet assets, or shareholders' equity.

    Profitability ratios indicate how efficiently a company generates profit and value for
    shareholders.

    Higher ratio results are often more favorable, ]

    Return on Assets (ROA) 


    Profitability is assessed relative to costs and expenses and analyzed in
    comparison to assets to see how effective a company is deploying assets to
    generate sales and profits. The use of the term "return" in the ROA measure
    customarily refers to net profit or net income—the value of earnings from sales
    after all costs, expenses, and taxes. ROA is net income divided by total assets.

    Return on Equity (ROE) 


    ROE is a key ratio for shareholders as it measures a company's ability to earn a
    return on its equity investments. ROE, calculated as net income divided by
    shareholders' equity, may increase without additional equity investments. The ratio
    can rise due to higher net income being generated from a larger asset base funded
    with debt.

    Capital employed refers to the amount of capital investment a business uses to operate and provides
    an indication of how a company is investing its money. Although capital employed can be defined
    in different contexts, it generally refers to the capital utilized by the company to generate profits.
    The figure is commonly used in the Return on Capital Employed (ROCE) ratio to measure a
    company’s profitability and efficiency of capital use.
    Capital Employed = Total Assets – Current Liabilities

    Return on Capital Employed

    Return on capital employed (ROCE) is a profitability ratio that measures the profitability of a
    company and the efficiency with which a company is using its capital. The ROCE is considered
    one of the best profitability ratios, as it shows the operating income generated per dollar of invested
    capital. The formula for ROCE is as follows:

     
    ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed

    The working capital formula is:

    Working Capital = Current Assets – Current Liabilities

    The working capital formula tells us the short-term liquid assets available after short-term liabilities
    have been paid off. It is a measure of a company’s short-term liquidity and is important for
    performing financial analysis, financial modeling, and managing cash flow.

    What is an Efficiency Ratio? 


    The efficiency ratio is typically used to analyze how well a company uses its assets
    and liabilities internally. An efficiency ratio can calculate the turnover of
    receivables, the repayment of liabilities, the quantity and usage of equity, and the
    general use of inventory and machinery. This ratio can also be used to track and
    analyze the performance of commercial and investment banks.

    What Is the Receivables Turnover Ratio? 


    The receivables turnover ratio is an accounting measure used to quantify a
    company's effectiveness in collecting its accounts receivable, or the money owed
    by customers or clients. This ratio measures how well a company uses and
    manages the credit it extends to customers and how quickly that short-term debt is
    collected or is paid. A firm that is efficient at collecting on its payments due will
    have a higher accounts receivable turnover ratio.

    What Is Working Capital Turnover? 


    Working capital turnover is a ratio that measures how efficiently a company is
    using its working capital to support sales and growth. Also known as net sales to
    working capital, working capital turnover measures the relationship between the
    funds used to finance a company's operations and the revenues a company
    generates to continue operations and turn a profit.

    A higher working capital turnover ratio is better, and indicates that a company is
    able to generate a larger amount of sales.

    What Is the Fixed Asset Turnover Ratio? 


    The fixed asset turnover ratio is a metric that measures how effectively a company
    generates sales using its fixed assets. There's no ideal ratio that's considered
    a benchmark for all industries. Instead, investors should compare a
    company's fixed asset turnover ratio to those of other companies in the
    same sector. If a company has a higher fixed asset turnover ratio than its
    competitors, it shows the company is using its fixed assets to generate sales better
    than its competitors.

     It is calculated by dividing net sales by the net of its property, plant, and
    equipment.
     A high ratio indicates that a company efficiently uses its fixed assets to
    generate sales, whereas a low ratio indicates that the firm does not efficiently
    use its fixed assets to generate sales.

    What Is the Asset Turnover Ratio? 


    The asset turnover ratio measures the value of a company's sales
    or revenues relative to the value of its assets. The asset turnover ratio can be used
    as an indicator of the efficiency with which a company is using its assets to
    generate revenue.

    The higher the asset turnover ratio, the more efficient a company is at generating
    revenue from its assets. Conversely, if a company has a low asset turnover ratio, it
    indicates it is not efficiently using its assets to generate sales.

    Stability is the long-term counterpart of liquidity. Stability analysis investigates how much
    debt can be supported by the company and whether debt and equity are balanced.

     debt-to-equity ratio = (Net debt) / (Shareholders’ equity)


     It is a measure of the degree to which a company is financing its operations
    through debt versus wholly owned funds. More specifically, it reflects the
    ability of shareholder equity to cover all outstanding debts in the event of a
    business downturn. The debt-to-equity ratio is a particular type of gearing
    ratio.

    What Is the Current Ratio? 


    The current ratio is a liquidity ratio that measures a company's ability to pay short-
    term obligations or those due within one year. It tells investors and analysts how a
    company can maximize the current assets on its balance sheet to satisfy its current
    debt and other payables.

    What Is the Quick Ratio? 


    The quick ratio is an indicator of a company’s short-term liquidity position and
    measures a company’s ability to meet its short-term obligations with its most liquid
    assets.

    Since it indicates the company’s ability to instantly use its near-cash assets (assets
    that can be converted quickly to cash) to pay down its current liabilities, it is also
    called the acid test ratio. An "acid test" is a slang term for a quick test designed to
    produce instant results.
    What Is the Interest Coverage Ratio? 
    The interest coverage ratio is a debt and profitability ratio used to determine how
    easily a company can pay interest on its outstanding debt. The interest coverage
    ratio may be calculated by dividing a company's earnings before interest and
    taxes (EBIT) by its interest expense during a given period.

    The interest coverage ratio is sometimes called the times interest earned (TIE)


    ratio. Lenders, investors, and creditors often use this formula to determine a
    company's riskiness relative to its current debt or for future borrowing.

    What Is Earnings Per Share (EPS)? 


    Earnings per share (EPS) is calculated as a company's profit divided by the
    outstanding shares of its common stock. The resulting number serves as an
    indicator of a company's profitability. It is common for a company to report EPS
    that is adjusted for extraordinary items and potential share dilution.

    The higher a company's EPS, the more profitable it is considered to be.

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