Profit Indicators

Profit Indicators

(From Investopedia)

A.  What DoesReturn On Equity - ROEMean?
The amount of net incomereturnedas a percentageof shareholders equity.Return on equitymeasures a corporation's profitabilityby revealing how muchprofit a company generateswith themoneyshareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not includepreferredshares.
Also known as "return on net worth" (RONW).
The ROE is usefulfor comparing the profitability of a company to that of other firms in the same industry.
There are several variations on the formula that investors may use:
1. Investors wishing tosee the return on common equity may modify the formula above by subtracting preferred dividends from netincomeand subtracting preferred equity from shareholders' equity,givingthe following: return on common equity (ROCE) =net income - preferred dividends / common equity.
2. Return on equity may also be calculated by dividing net income byaverageshareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.
3. Investors may also calculate thechangein ROE for a period by firstusingthe shareholders' equity figurefrom thebeginning ofa periodasa denominatorto determine the beginningROE.Then, the end-of-period shareholders' equity can be used as the denominatorto determinethe ending ROE. Calculating both beginning and endingROEs allows an investor to determine the change in profitability over the period.

B.  Return On Assets - ROA

What DoesReturn On Assets - ROAMean?
An indicator of how profitable a company is relative to its total assets.ROA gives an ideaas to howefficientmanagement isat using its assets to generate earnings.Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".
The formula for return onassetsis:

Note: Someinvestors add interest expense back into net income when performing this calculation becausethey'd like to use operating returns beforecostof borrowing.
Filed Under:Acronyms,Formulas
ROAtells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure,it is best to compare it againsta company'sprevious ROA numbers or the ROA of a similar company.
The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an ideaof how effectively the company is converting themoneyit hasto invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 millionand totalassets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million,it hasan ROA of 10%. Based on this example, the first companyis better at converting its investment into profit. When you really think about it,management's most important job is to make wise choicesin allocatingits resources. Anybody can make a profit by throwing a ton of money at a problem, butvery few managers excel at making large profits with little investment.

C.  Return On Capital Employed - ROCE

What DoesReturn On Capital Employed - ROCEMean?
A ratio that indicates the efficiency and profitability of a company's capital investments.
Calculated as:

ROCE should always be higher than the rateat whichthe company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.
A variation of this ratio is return on average capital employed (ROACE), which takes the average of opening and closing capital employed for the time period.

D.  Return On Average Equity - ROAE

What DoesReturn On Average Equity - ROAEMean?
An adjusted version of the return on equity (ROE) measure of company profitability, in which the denominator,shareholders' equity, is changed to average shareholders' equity. Typically, return on average equity refers to a company's performance over a fiscal year, so the average-equity denominator is usually computed as the sum of the equityvalueat the beginning and end of the year, divided by two.
A measure of return on average equity can give a more accurate depiction of a company's corporate profitability, especially in instances where the value of theshareholders' equity has changed considerably during a fiscal year. In situations where theshareholders' equity does not change or changes by very little during a fiscal year, the ROE and ROAE numbers should be identical, or at least similar.

E.  Return On Gross Invested Capital - ROGIC

What DoesReturn On Gross Invested Capital - ROGICMean?
The amount that a company earns on the total investmentit has made in its business. Total gross invested capital is equal to all of the shareholders' equity (both common andpreferredshares) plus the total gross debt that the company has accumulated before making any payments on the debt.

F. Return On Investment - ROI

What Does Return On Investment - ROIMean?
A performance measure used to evaluate the efficiency of aninvestment or to compare the efficiency of a number of differentinvestments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.
The return oninvestmentformula:

In the above formula "gains from investment", refers to the proceedsobtained from selling the investment of interest.Return on investmentis a very popular metric because of its versatilityand simplicity. That is, if aninvestment does not havea positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.
Keep in mind that the calculation forreturnoninvestmentand, therefore the definition, can be modified to suit the situation -it all depends on what you include as returns and costs. The definition of the term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation.
For example, a marketer may compare two different products by dividing thegross profitthat each producthas generated byits respective marketing expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps bydividing the netincomeof an investment bythe total value ofall resources that have been employed to make and sell the product.
This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can beexpressed in many different ways. When using this metric, make sure you understand what inputs are being used.
G.  Internal Rate Of Return (IRR)
Thediscount rate often used in capital budgeting that makes the netpresentvalueof all cash flows from a particular projectequal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.
IRR is sometimes referredto as"economicrateof return (ERR)".
You can think of IRR as the rate of growth a projectis expected to generate. While the actual rate of return thata given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRRvaluethan other available options would still provide a much better chance of strong growth.
IRRs can also be compared against prevailing rates of return in the securities market. If a firm can't find any projects with IRRs greater than the returns that can be generated in thefinancial markets, it may simply choose to invest its retained earnings into the market.