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Financial Ratios - Return On Investment Ratios: Dividend Investing Basics Stocks

Return on investment ratios measure how efficiently a company generates profits from its assets and equity. The document discusses four common return on investment ratios: return on assets, return on common equity, return on total equity, and return on total capital. Each ratio is defined and includes the formula used to calculate it.

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Bhaskar Mukherjee
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44 views1 page

Financial Ratios - Return On Investment Ratios: Dividend Investing Basics Stocks

Return on investment ratios measure how efficiently a company generates profits from its assets and equity. The document discusses four common return on investment ratios: return on assets, return on common equity, return on total equity, and return on total capital. Each ratio is defined and includes the formula used to calculate it.

Uploaded by

Bhaskar Mukherjee
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Investopedia

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Financial Ratios - Return on Investment Ratios


Filed Under Dividend, Investing Basics, Stocks 1. Return on Assets (ROA) This ratio measures the operating efficacy of a company without regards to financial structure Formula 7.21 Return on assets = (net income + after-tax cost of interest) average total assets OR Return on assets = earnings before interest and taxes average total assets Where: Average total assets = (previously reported total assets + current total assets) 2 2. Return on Common Equity (ROCE) This ratio measures the return accruing to common stockholders and excludes preferred stockholders. Formula 7.22 Return on common equity = (net income - preferred dividends) average common equity Where: Average common equity = (previously reported common equity + current common equity) / 2 3. Return on Total Equity (ROE) This is a more general form of ROCE and includes preferred stockholders. Formula 7.23 Return on total equity = net income/average total equity Where: Average common equity = (previously reported total stockholders' equity + current total stockholders' equity) / 2 4. Return on Total Capital (ROTC) Total capital is defined as total stockholder liability and equity. Interest expense is defined as the total interest expense excluding any interest income. This ratio measures the total return the company generates from all sources of financing. Formula 7.24 Return on total capital = (net income + interest expense) average total capital

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