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1.The amount of net income returned as a percentage of shareholders equity. Return on equity measures a
corporation's profitability by revealing how much profit a company generates with the money
shareholders 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 include preferred shares.
Also known as "return on net worth" (RONW).
2. Return on equity (ROE) is a measure of profitability that calculates how many dollars
of profit a company generates with each dollar of shareholders' equity. The formula for ROE is:
ROE = Net Income/Shareholders' Equity
ROE is sometimes called "return on net worth."
Why it Matters:
ROE is more than a measure of profit; it's a measure of efficiency. A rising ROE suggests that a
company is increasing its ability to generate profit without needing as much capital. It also indicates
how well a company's management is deploying the shareholders' capital. In other words, the higher
the ROE the better. Falling ROE is usually a problem.
However, it is important to note that if the value of the shareholders' equity goes down, ROE goes
up. Thus, write-downs and share buybacks can artificially boost ROE. Likewise, a high level
of debt can artificially boost ROE; after all, the more debt a company has, the less shareholders'
equity it has (as a percentage of total assets), and the higher its ROE is.
Some industries tend to have higher returns on equity than others. As a result, comparisons of
returns on equity are generally most meaningful among companies within the same industry, and the
definition of a "high" or "low" ratio should be made within this context.
3. Return on equity (ROE) measures the rate of return on the money invested by common stock
owners and retained by the company thanks to previous profitable years. It demonstrates a
company's ability to generate profits from shareholders' equity (also known as net assets or assets
minus liabilities).
ROE shows how well a company uses investment funds to generate growth. Return on equity is
useful for comparing the profitability of companies within a sector or industry.
Investors generally are interested in company's that have high, increasing returns on equity.
Formula
Return on Equity = Net Income / Average Common Shareholder's Equity
Notes:
Average Common Shareholder's equity excludes preferred stock.
YCharts uses trailing 12 month net income and average of past five quarters of book value of
shareholder's equity when calculating ROE. This differs from the common textbook formula ROE =
Net Income / ((Beginning Shareholder's Equity + Ending Shareholder's Equity)/2).
Why we differ:
Economically, the theory is that you want to determine how much income the company is earning
from each dollar of equity invested in the firm, and by using only the beginning and ending equity,
the investor misses anything that may have happened in the middle of the fiscal year.
The greater a company's earnings in proportion to its assets (and the greater the coefficient
from this calculation), the more effectively that company is said to be using its assets.
To calculate ROTA, you must obtain the net income figure from a company's income
statement, and then add back interest and/or taxes that were paid during the year. The
resulting number will reveal the company's EBIT. The EBIT number should then be divided
by the company's total net assets (total assets less depreciation and any allowances for bad
debts) to reveal the earnings that company has generated for each dollar of assets on its
books.
2. Also called Return on Total Investment, or ROI, the Return on Total Assets
measures the Net Earnings in relation to the Total Assets. The Return on Total
Assets identifies how well the investments of the company (the Total Assets)
have generated earnings (Net Earnings) back to the company.
3. A publicly-traded company's earnings before interest and taxes, divided by its total
assets, expressed as a percentage. This is ameasure of how well the company is using its assets to gen
erate earnings. A high return on total assets indicates that the company isinvesting wisely and is likely pr
ofitable; a low return on equity indicates the opposite.
The gross margin is not an exact estimate of the company's pricing strategy but it does give
a good indication of financial health. Without an adequate gross margin, a company will be
unable to pay its operating and other expenses and build for the future. In general, a
company's gross profit margin should be stable. It should not fluctuate much from one
period to another, unless the industry it is in has been undergoing drastic changes which will
affect the costs of goods sold or pricing policies.
For example, suppose that ABC Corp. earned $20 million in revenue from producing
widgets and incurred $10 million in COGS-related expense. ABC's gross profit margin would
be 50%. This means that for every dollar that ABC earns on widgets, it really has only $0.50
at the end of the day.
This metric can be used to compare a company with its competitors. More efficient
companies will usually see higher profit margins.
Things to Remember
The results may skew if the company has a very large range of
products.
2. Gross profit margin is a profitability ratio that measures how much of every dollar
of revenues is left over after paying cost of goods sold (COGS).
How it works/Example:
Gross profit margin is calculated by subtracting cost of goods sold (COGS) from total revenue and
dividing that number by total revenue.
The top number in the equation, known as gross profit or gross margin, is the total revenue minus
the direct costs of producing that good or service. Direct costs (COGS) do not include operating
expenses, interest payments and taxes.
To illustrate, let's say Company ABC makes shoes. If ABC reported $5,000,000 in total revenue for
theyear and cost of goods sold (cost of materials and direct labor) of $2.5 million, then we can use
the formula above to find ABC's gross profit margin:
Gross Profit Margin = ($5,000,000 - $2,500,000) / $5,000,000 = 50%
The gross profit margin percentage tells us that Company ABC uses 50% of its revenue to pay for
the direct costs of making its shoes. The rest can be used for operating expenses, interest,
taxes, dividendpayouts, etc.
Why it Matters:
Gross profit margin is a key measure of profitability by which investors and analysts compare similar
companies and companies to their overall industry. The metric is an indication of the financial
success and viability of a particular product or service. The higher the percentage, the more the
company retains on each dollar of sales to service its other costs and obligations.
Analysts are constantly asking themselves, "Why can some industries maintain profit margins that
are so much higher than others?" The answer lies with Porter's Five Forces, a classic business
framework for discovering which firms will outperform the competition. To learn more, click here to
learn aboutUsing Porter's Five Forces to Lock In Long-Term Profits.
3. A measure of how well a company controls its costs. It is calculated by dividing a compa
ny's profit by its revenues and expressingthe result as a percentage. The higher the gross
profit margin is, the better the company is thought to control costs. Investors use thegros
s profit margin to compare companies in the same industry and well as in different industr
ies to determine what are the mostprofitable. It is also called the profit margin or simply t
he margin.
Farlex Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved
A measure calculated by dividing gross profit by net sales. Gross profit margin is an indication o
f a firm's ability to turn a dollar of salesinto profit after the cost of goods sold has been accounted
for. Also called gross margin, margin of profit. Compare net profit margin.See also return on
sales.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott.
Copyright 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company.
All rights reserved.
2.
A way for a company to measure the amount of revenue that is left over after their operating costs,
thus helping to also determine an appropriate pricing strategy for products that are produced and
offered.
net profit margin is, the more effective the company is at converting revenue
into actual profit. The net profit margin is a good way of comparing companies in
the same industry, since such companies are generally subject
to similar business conditions. However, the net profit margins are also a good way
to to compare companies in different industries in order to gauge which industries
are relatively more profitable. also called net margin.
2. Net profit margin is the percentage of revenue remaining after all operating expenses,
interest, taxesand preferred stock dividends (but not common stock dividends) have been
deducted from a company's total revenue.
How it works/Example:
The formula for net profit margin is:
(Total Revenue Total Expenses)/Total Revenue = Net Profit/Total Revenue = NetProfit
The net amount earned by a business after all taxation related expenses have been deducted. The profit
after tax is often a better assessment of what a business is really earning and hence can use in
its operations than its total revenues.
2. The net profits of a company after taxation. This is the 'bottom line' that you
often hear about. Dividends are paid out of net profits after tax, and the amount
that isn't paid out is the retained profit.
1.
2. The total asset turnover ratio measures the ability of a company to use its assets
to efficiently generate sales. This ratio considers all assets, current and fixed.
Those assets include fixed assets, like plant and equipment, as well
as inventory, accounts receivable, as well as any other current assets.
The calculation for the total asset turnover ratio is:
Net Sales/Total Assets = # Times
Cash and short-term assets expected to be converted to cash within a year less short-term
liabilities. Businesses use net workingcapital to measure cash flow and the ability to service
debts. A positive net working capital indicates that the firm has money inorder to maintain or exp
and its operations. Net working capital tends not to add much to the business' assets, but helps k
eep it runningon a day-to-day basis.
2.
Net working capital is used to measure the short-term liquidity of a business. The
measurement can also be used to obtain a general impression of the ability of company
management to utilize assets in an efficient manner. To calculate net working capital, use the
following formula:
+ Cash
+ Marketable investments
+ Trade accounts receivable
+ Inventory
- Trade accounts payable
= Net working capital
3.
The formula for net working capital (NWC), sometimes referred to as simply working
capital, is used to determine the availability of a company's liquid assets by
subtracting its current liabilities.
Current Ratio:
1. A liquidity ratio that measures a company's ability to pay short-term obligations.
The Current Ratio formula is:
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
2. An indication of a company's ability to meet short-term debt obligations; the higher
the ratio, the more liquid the company is. Current ratio is equal to current
assets divided by current liabilities. If the current assets of a company are more than
twice the current liabilities, then that company is generally considered to have
good short-term financial strength. If current liabilities exceed current assets, then
the company may have problems meeting its short-term obligations.
3. An indication of a company's ability to meet short-term debt obligations; the higher
the ratio, the more liquid the company is. Current ratio is equal to current
assets divided by current liabilities. If the current assets of a company are more than
twice the current liabilities, then that company is generally considered to have
good short-term financial strength. If current liabilities exceed current assets, then
the company may have problems meeting its short-term obligations.
Gearing:
1. The level of a companys debt related to its equity capital, usually expressed in
shows the extent to which its operations are funded by lenders versus
shareholders. The term gearing also refers to the ratio between a companys
stock price and the price of its warrants. Gearing can be measured by a number
of ratios, including the debt-to-equity ratio, equity ratio and debt-service ratio. The
appropriate level of gearing for a company depends on its sector, as well as the
degree of leverage employed by its peers.
2. The most common use of the term 'gearing' is to describe the level of a
company's net debt (net of cash or cash equivalents) compared with its equity
capital, and usually it is expressed as a percentage. So a company with gearing of
60 per cent has levels of debt that are 60 per cent of its equity capital. The
gearing ratio shows how encumbered a company is with debt. Depending on the
industry, a gearing ratio of 15% would be considered prudent while anything over
100% would be considered risky or 'highly geared'. 'Gearing' is also used in a
related sense to refer to borrowings by an investment trust that boosts the return
on capital and income via additional investment. When the trust is performing
well shareholders enjoy an enhanced or 'geared profit'. However if the trust
performs poorly then the loss is similarly exaggerated. Gearing can also refer to
the ratio between a company's share price and its warrant price.
3. Gearing focuses on the capital structure of the business that means the proportion
of finance that is provided by debt relative to the finance provided by equity (or
shareholders).
3.The times interest earned, also known as interest coverage ratio, is a measure of how
well a company can meet its interest-payment obligations.
The formula for times interest earned is:
Earnings Before Interest and Taxes/ Interest Expense
3.Net income of a firm divided by the number of its outstanding shares the shares held by
the stockholders (shareholders). Primary earnings per share (also called fully diluted EPS) takes
into account all shares currently outstanding, plus the number of shares that would be outstanding
if all convertible bonds and convertible preferred stock (preference shares) were exchanged
for common stock (ordinary shares). Also called net income per share. Formula: (Total revenue Total expenses) Number of outstanding shares.
Market Price:
1. The current price at which an asset or service can be bought or sold. Economic
theory contends that the market price converges at a point where the forces of
supply and demand meet. Shocks to either the supply side and/or demand side can
2. DPS. The amount of dividend that a stockholder will receive for each share
of stock held. It can be calculated by taking the total amount of dividends paid and
dividing it by the total shares outstanding. If a company issues a $1 million dividend
and has 10 million shares, the dividend per share is 10 cents ($1 million divided by
10 million shares).
Div Yield:
1. A financial ratio that shows how much a company pays out in dividends each year relative
to its share price. In the absence of any capital gains, the dividend yield is the return on
investment for a stock. Dividend yield is calculated as follows: