Profitability ratio-
1 Return on assets (ROA)
It can be calculated as:
ROA = (Net income/ Average total assets).
A company with higher ROA is better for investment as it means that the company’s management is efficient in using its assets to generate earnings.
2 Earnings per share (EPS)
It is calculated using the formula EPS = (Net Income – Dividends on Preferred Stock)/Average Outstanding Shares.
As a rule of thumb, companies with increasing Earnings per share for the last couple of years can be considered as a healthy sign.
3 Return on equity (ROE)
It can be calculated as:
ROE= (Net income/ average stockholder equity).
It shows how good the company is in rewarding its shareholders.
A higher ROE means that the company generates a higher profit from the money that the shareholders have invested.
4 Net Profit margin 5 Return on capital
Profit margin reveals how good a company is at converting revenue into profits available for shareholders.
It can be calculated as:
Profit margin = (Net income/sales)
A company with a steady and increasing profit margin is suitable for investment.
5 Return on capital employed (ROCE)
ROCE measures the company’s profit and efficiency in terms of the capital it employs.
It can be calculated as
ROCE= (EBIT/Capital Employed) Where EBIT Earnings before interest and taxCapital employed is the total number of capital that a company utilizes in order to generate profit. liabilities.