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Category Archives for "Profitability Ratio"
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Return on Sales Ratio

This is an ultimate guide on how to calculate Return on Sales (ROS) ratio with in-depth interpretation, analysis, and example. You will learn how to use its formula to evaluate a company's profitability.

Definition - What is Return on Sales Ratio (ROS)?​

The return on sales ratio gives you an effective way to measure the efficiency with which a company converts its revenues into profits.

Essentially an assessment of a firm’s financial performance, the ROS ratio shows you how much of a company’s operational income is actually yielding a net gain.

This profitability ratio is particularly useful when evaluating a potential investment opportunity because it allows you to compare companies within the same industry, regardless of their size.

By comparing earnings to net sales, the ratio calculates the return on net sales as a percentage that can also be used to conveniently analyze the operational efficiency of the same business, over a range of reporting periods.

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Return On Average Capital Employed

This is a detailed guide on how to calculate Return on Average Capital Employed Ratio (ROACE) with in-depth analysis, interpretation, and example. You will learn how to use its formula to assess a business profitability.

Definition - What is Return On Average Capital Employed Ratio (ROACE)?

To analyze what the profitability of a company is, based on the investments it has made, we can use the return on average capital employed ratio (ROACE).

This is different to the return on capital employed ratio (ROCE) because it takes into account the average of the working capital of a given year as opposed to simply using the closing figure shown at the end of the period.

A higher ratio is better as it suggests a company is much more efficient at gaining profits from a small portion of capital assets whereas those businesses that struggle to make the conversion will have a lower return.

This ratio is especially useful when analyzing companies who operate in capital intensive industries and is vital for investors when trying to determine the performance capabilities and profitability of the business.

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Return On Invested Capital

This is a complete guide on how to calculate Return on Invested Capital Ratio (ROIC) with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a company's profitability.

Definition - What is Return on Invested Capital?

The return on invested capital ratio (ROIC) is a simple calculation that helps you figure out how well a company is using the money stockholders have invested into it.

The higher the ROIC ratio, the smarter the company is about spending its money to increase profits.

This ratio is particularly useful when it’s used to compare with a company’s weighted average cost of capital (WACC).

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Return on Research Capital Ratio

This is an in-depth guide on how to calculate Return on Research Capital Ratio (RORC) with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a firm's profitability.

Definition - What is Return on Research Capital Ratio?

The return on research capital ratio (RORC) assesses the return a company earns as a result of expenditure on research and development activities.

As research and development are a key technique for companies to create new products, this is an important metric to understand a company’s productivity and capabilities.

Pharmaceutical and tech companies who typically spend heavily on R&D would be the most common users of this metric.

As a general rule, the higher the RORC ratio, the better as it would suggest that the company is achieving a good return on its R&D investment and this is what any investor wants to see.

A low return on research capital would, on the other hand, suggest that the company is not achieving a good return per $1 and subsequently, would potentially need to review future expenditure on R&D.

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