Financial Ratios - Return on Investment Ratios
II. Return on Investment
1. Return on Assets (ROA)
This ratio measures the operating efficacy of a company without regards to financial structure
Return on assets = (net income + after-tax cost of interest)
average total assets
Return on assets = earnings before interest and taxes
2. Return on Common Equity (ROCE)
This ratio measures the return accruing to common stockholders and excludes preferred stockholders.
Return on common equity = (net income - preferred dividends)
average common equity
3. Return on Total Equity (ROE)
This is a more general form of ROCE and includes preferred stockholders.
Return on total equity = net income
average total equity
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.
Return on total capital = (net income + interest expense)
average total capital