Important Financial ratios for investors

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.