Profitability in relation to investment, Finance Basics

Profitability in relation to investment - Profitability Ratio

a) Return on Investment (ROI) or return on total asset (ROTA)

= (Net profit/ Total asset) x 100

The ratio indicate the return on profit from investment of Sh.1 in total assets e.g a ratio of 20% means Sh.10 of total asset generated Sh.2 of net profit.

b) Return on equity (ROE) = (Net profit/ equity) x 100

It is called also like or Return on net worth (RONW) or Return on shareholders' equity (ROSE)

The ratio signify the return of profitability for every one shilling of equity capital added via the shareholders as a ratio of 25% means one shilling of equity generates Sh.0.25 profit attributable to ordinary shareholders.

C) Return on capital employed ROCE =   (Net profit/ Net Asset (Capital employed)) x 100

It is called also like or Return on net asset (RONA).

These ratios show the returns of profitability for every single shilling of capital working in the firm.

Posted Date: 1/30/2013 2:09:34 AM | Location : United States

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