Understanding ROE, ROA, and ROI Ratios
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ScribdTranslationsUnderstanding ROE, ROA, and ROI Ratios
Translated by
ScribdTranslationsREASONS FOR PROFITABILITY OF
A company ROE, ROA ROI
a) Return on equity rate:
(ROE-RETURN ON EQUITY): It is the return on equity (K) achieved by the
shareholder. The ROE is equal to the ratio of earnings after interest and taxes (EAT)
y the investment carried out for the shareholder (K).
ROE PROFITABILITY ABOUT THE HERITAGE - FINANCIAL INDEX:
Indicate the level of profits (in soles) generated by each sol of shareholders' equity.
it is obtained by dividing the net profit by the equity.
FORMULA:
ROE = UAII + INTERESTS - TAXES / EQUITY
b) Return on assets rate:
ROA - RETURN ON ASSETS: It is the economic return on TOTAL ASSETS of the
Total investment (A) made without considering the way it is financed. The ROA is equal to the ratio
between the operating profit before taxes (EBIT) and the total investment, which in this case is
equivalent to total assets
FORMULA
ROA = Net Operating Income + Interest - Taxes / Total Assets
ANALYSIS:
Therefore, to compare ROA and ROE, it is necessary to adjust operating profit through the
factor (1-t). The study of the financing structure (D/K) in companies is supported by
two basic propositions (MODIGLIANI-MILLER THEOREM), which can be proven
when the following assumptions are made:
That the company with/without leverage has the same benefit before interest and
taxes (EBIT) and is subject to the same level of business risk, that is, the variance
the ROA remains in the same risk class.
The interest rate does not vary for any level of the company's indebtedness. No
There are no intermediary costs or other types of restrictions.
The same result is obtained if financial leverage is carried out in a way
individual for each of the shareholders or for the company.
ROA (Return on Assets). Return on assets, represents profitability
from the company, regardless of how the asset is financed. It
calculate as the quotient between the EBITDA and total assets.
This ratio is used in the analysis of financial entities, measuring the
return on average total assets,usually expressed as a percentage.
It is calculated by dividing the net profit of the entity by the average total assets of
the same.
c) Rate of return on investment performance:
Return on investment (ROI)
It is a financial ratio that compares the profit or benefit obtained in relation to
to the investment made, that is, it represents a tool to analyze the
performance that the company has from the financial point of view
(NET PROFIT/NET SALES X NET SALES/ TOTAL ASSETS)
Better known as the DUPONT Index
DUPONT ANALYSIS
DUPONT INDEX - is one of the financial ratios for investment profitability.
important in the analysis of the economic and operational performance of a company.
The DUPONT system integrates or combines the main financial indicators in order to
determine the efficiency and effectiveness with which the company is using its assets, its capital
of work, and the capital multiplier (Financial Leverage).
In principle, the DUPONT system brings together the net profit margin, the turnover of the
total assets of the company and its financial leverage.
These three variables are responsible for the economic growth of the company.
which obtains its financial resources either from a good profit margin on sales,
or an efficient use of its fixed assets, which implies a good turnover of them.
Starting from the premise that the profitability of the company depends on three factors such as
it is the profit margin on sales, and the turnover of its assets, and leverage
financial, it could be understood that the Dupont system identifies the way
how the company is obtaining its profitability, which could allow identifying its
puntos fuertes
Formula:
(NET INCOME / SALES) * (SALES / TOTAL ASSETS) (MULTIPLIER OF
CAPITAL)(FINANCIAL LEVERAGE)
OTHER WAYS TO ANALYZE A COMPANY'S PROFITABILITIES:
Profitability ratios
Net profit margin (ROA) = Net income - taxes
Sales
Return on assets = UAII–taxes
Average total assets
Return on Equity (ROE) = UDII (Profit available to shareholders)
Average equity
Dividend distribution = Dividend per share
Earnings per share
Market value ratios
Net income per share = Net income
Number of actions
Book value per share = Equity
Number of actions
Price earnings ratio (PER) = Price of the stock
Earnings per share
Market value to book value = Stock price
Book value
Dividend yield = Dividend per share
Stock price
ECONOMIC VALUE ADDED THE ADDED
EVA (Economic Value Added)
ECONOMIC VALUE ADDED (EVA); its initials in English is a tool
financial amount that could be defined as the amount remaining after deducting from the
total income of expenses, including the opportunity cost of capital and the
taxes.
EL EVA; is the result obtained once all have been covered
expenses and satisfied a minimum expected profitability by the
shareholders of the company.
FORMULA:
E.V.A. = OPERATING INCOME AFTER
TAXES–C.P.P.K * (INVESTED CAPITAL)) = $
WHERE:
C.P.P.K = WACC (Weighted Average Cost of Capital)
OPERATING UTILITY AFTER TAXES: EBIT X (1 - EFFECTIVE RATE
OF TAXES)
INVESTED CAPITAL: TOTAL ASSET - OPERATING LIABILITIES WITHOUT COST
FINANCIAL
ANOTHER MORE PRACTICAL WAY:
EVA = NET INCOME - CAPITAL
COMPANY X C.P.P. K (%)