Net Profit Rate

Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue

Net Profit Rate                                  =          Net Profit    *   100

                                                                        Net Revenue

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Return on Investment (Return on Capital Employed) (BPIT)

ROCE compares earnings with capital invested in the company. It could be considered as one of the key profitability ratios of an insurance company. However this comprises two components, namely Profit Before Earnings and Tax (PBIT) and Capital Employed.

 PBIT

In an insurance concern PBIT is noramlly equivalent to the profit from operations (the numerator of the ratio).

Capital Employed (share holder funds)

In the denominator we have net assets or capital. Capital Employed in general is the capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities or fixed assets plus working capital.

ROCE uses the reported (period end) capital numbers.

Formula for ROCE (Return on Capital Employed)

ROCE (Return on Capital Employed)               =          PBIT                       *   100

                                                                                                Capital Employed

Return on Equity

Return on Equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth.

ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. As with many financial ratios, ROE is best used to compare companies in the same industry.

High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS), you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate.

ROE         =            Profit after I,T & PD x 100

                                    Equity

Return On Assets

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

ROA                 =                 Net Profit* x 100

                                                   Total Assets

ROA tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company.

The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.

EPS – Earnings Per Share

The EPS formula does not include preferred dividends for categories outside of continued operations and net income. Earning per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.

The portion of a company’s profit allocated to each outstanding share of common stock earning per share serves as an indicator of a company’s profitability. 

EPS     =          Earnings (Profit)

Weighted number of equity shares in issue

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time.  However, data sources sometimes  simplify the calculation by using the number of shares outstanding at the end of the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Price Earning Ratio – P/E

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings multiple", or simply "multiple") is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation, a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. The P/E ratio has units of years, which can be interpreted as "number of years of earnings to pay back purchase price", ignoring the time value of money. In other words, P/E ratio shows current investor demand for a company share. The reciprocal of the PE ratio is known as the earnings yield. The earnings yield is an estimate of expected return to be earned from holding the stock if we accept certain restrictive assumptions (a discussion of these assumptions can be found here).

P/E Ratio            =         Market price per share

                                               EPS

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price.  In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

Quantifies the relationship between DPS (dividend per share) and market price per share.

Dividend Yield                =       DPS (Dividend Per Share)

                                                         Market Price Per Share

Dividend yield is a way to measure how much cash flow you are getting for each rupee invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields.

Note that dividend yield changes because of two things. First, the stock price goes up (yield drops) or down (yield increases). Second, the company increases the dividend (yield increases) or cuts the dividend (yield drops). However, note that the yield being paid at the time we purchase the stock is what we investment will earn from dividends as long as you hold the stock, regardless of what the share price does. Dividend yield is an important part of your rate of return on an investment. If we purchase a stock that goes up by 8% in a year while paying a 3% dividend, then we've earned 11% on your money.