II. Return on Investment

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) Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  average total assets OR Return on assets = earnings before interest and taxes Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  average total assets Where:Average total assets = (previously reported total assets + current total assets) Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  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) Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  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 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  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) Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â  average total capital
Operating Efficiency Ratios

Related Articles
1. Investing

### ROA And ROE Give Clear Picture Of Corporate Health

Both measure performance, but sometimes they tell a very different story. This is why theyâ€™re best used together.
2. Investing

### ROA and ROE Give Clear Picture Of Corporate Health

ROE indicates if a companyâ€™s value is growing at an acceptable rate. ROA reveals how much profit a company earns for every dollar of assets.
3. Investing

### Earnings Power Drives Stocks

Internal return on investment helps determine a stock's ability to propel shareholder returns.
4. Investing

### High Return On Equity Businesses

Companies with high returns on equity usually see an increasing stock price in the future.
5. Investing

### Calculating Return on Net Assets

Return on net assets measures a companyâ€™s financial performance.
6. Investing

### What Does Negative Shareholder Equity On A Balance Sheet Mean?

Negative shareholder equity on a companyâ€™s balance sheet is a red flag that should prompt potential investors to take a closer look before committing their money.
7. Investing

### Calculating Annualized Total Return

The annualized total return is the average return of an investment each year over a given time period.
8. Managing Wealth

### Understanding Total Returns

Total return measures the rate of return earned from an investment over a period of time.
9. Investing

### What is the Shareholder Equity Ratio?

The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.
10. Investing

### Key Financial Ratios for Pharmaceutical Companies

Because of the unique requirements for bringing products to market, pharmaceutical industry stocks are best analyzed by using certain key financial ratios.