{"id":1635,"date":"2021-07-24T20:01:31","date_gmt":"2021-07-24T14:31:31","guid":{"rendered":"https:\/\/flattrade.in\/kosh\/?p=1635"},"modified":"2023-01-11T08:22:45","modified_gmt":"2023-01-11T02:52:45","slug":"important-profitability-ratios-return-ratios-part-2","status":"publish","type":"post","link":"https:\/\/flattrade.in\/kosh\/important-profitability-ratios-return-ratios-part-2\/","title":{"rendered":"Important Profitability Ratios (Return Ratios) &#8211; Part 2"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"1635\" class=\"elementor elementor-1635\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-3e013d8 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"3e013d8\" data-element_type=\"section\" data-e-type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-50f4879\" data-id=\"50f4879\" data-element_type=\"column\" data-e-type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-54e5647 elementor-widget elementor-widget-text-editor\" data-id=\"54e5647\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p><b><span style=\"font-family: Roboto, sans-serif; font-size: 16px; font-style: normal;\">Re<\/span><span style=\"font-family: Roboto, sans-serif; font-size: 16px; font-style: normal;\">turn ratios<\/span><\/b><\/p>\n<p>Return ratios are a group of ratios, which are also part of profitability ratios. These ratios are&nbsp;<span style=\"font-size: 16px;\">different from margin ratios that were discussed earlier. Return ratios help investors to&nbsp;<\/span><span style=\"font-size: 16px;\">determine how efficiently a company manages its capital for various investments and in&nbsp;<\/span><span style=\"font-size: 16px;\">generating profit. Capital is nothing but funds raised through equity or debt.&nbsp;&nbsp;<\/span><span style=\"font-size: 16px;\">Equity capital is raised by issuing shares to investors. One of the ways is through initial&nbsp;<\/span><span style=\"font-size: 16px;\">public offering. Debt capital is raised through issuing corporate bonds, where interest needs&nbsp;<\/span><span style=\"font-size: 16px;\">to be paid by the company periodically to bondholders.&nbsp;&nbsp;<\/span><\/p>\n<p>There are quite a few return ratios, but we will discuss the most important and popular return&nbsp;<span style=\"font-size: 16px;\">ratios.&nbsp;<\/span><\/p>\n<p><b>Return on Equity<\/b>: This is one of the most popular return ratios among investors. Long-term Investors&nbsp;<span style=\"font-size: 16px;\">keenly look at this number before selecting a particular stock. It is a ratio which is used to&nbsp;<\/span><span style=\"font-size: 16px;\">measure efficiency of a company in making use of shareholders\u2019 funds to generate good&nbsp;<\/span><span style=\"font-size: 16px;\">profits. Higher ROE ratio is good for a company and shareholders because the company is&nbsp;<\/span><span style=\"font-size: 16px;\">less dependent on bonds or debt to raise capital and the company is also good at generating&nbsp;<\/span><span style=\"font-size: 16px;\">better returns for shareholders.&nbsp;<br><\/span><span style=\"font-size: 16px;\"><br><b>Return on Equity = Net income after tax\/Shareholders\u2019 equity&nbsp;<\/b><br><\/span><span style=\"font-size: 16px;\">where,&nbsp;<\/span><span style=\"font-size: 16px;\"><b>Shareholders\u2019 equity = Funds raised through equity share capital + reserves&nbsp;&nbsp;<\/b><\/span><\/p>\n<p><span style=\"font-size: 16px;\"><b>Return on Capital Employed<\/b>: It is slightly different from ROE, because, while calculating&nbsp;<\/span><span style=\"font-size: 16px;\">ROCE, we have to take into account all forms of funds raised through equity and debt. One&nbsp;<\/span><span style=\"font-size: 16px;\">more difference is we take earnings before interest and taxes (EBIT) and not net profit after&nbsp;<\/span><span style=\"font-size: 16px;\">tax. Higher ROCE indicates a company is good at using both forms of capital.&nbsp;&nbsp;<\/span><span style=\"font-size: 16px;\">&nbsp;<\/span><\/p>\n<p><b>ROCE = EBIT\/Total capital employed&nbsp;<\/b><br><span style=\"font-size: 16px;\"><br>where,<b> Total capital employed = Shareholders\u2019 funds + Debt capital <\/b>(or)&nbsp;<br><\/span><span style=\"font-size: 16px;\"><b>Total capital employed = Total assets &#8211; Current Liabilities&nbsp;<\/b><br><\/span><span style=\"font-size: 16px;\"><br><b>Return on Assets<\/b>: This ratio is used to evaluate a company\u2019s profitability to its total assets&nbsp;<\/span><span style=\"font-size: 16px;\">and it is represented as a percentage. It shows the company\u2019s efficiency in generating net&nbsp;<\/span><span style=\"font-size: 16px;\">income using the assets available. It also tells whether a company is asset intensive or not.&nbsp;<\/span><span style=\"font-size: 16px;\">Companies in the infrastructure industry, manufacturing sector, heavy industries, etc. are&nbsp;&nbsp;<\/span><span style=\"font-size: 16px;\">likely to have lower ROA as they are asset intensive.&nbsp;&nbsp;<\/span><\/p>\n<p><b>ROA = Net Income\/Total Assets&nbsp;<\/b><\/p>\n<p><a href=\"https:\/\/flattrade.in\/kosh\/important-profitability-ratios-margin-ratios-part-1\/\">Read Part 1<\/a><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"Return ratios Return ratios are a group of ratios, which are also part of profitability ratios. These ratios&hellip;","protected":false},"author":5,"featured_media":1642,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"csco_display_header_overlay":false,"csco_singular_sidebar":"","csco_page_header_type":"","csco_page_load_nextpost":"","csco_post_video_location":[],"csco_post_video_location_hash":"","csco_post_video_url":"","csco_post_video_bg_start_time":0,"csco_post_video_bg_end_time":0,"csco_post_video_bg_volume":false,"footnotes":""},"categories":[59],"tags":[62,64],"class_list":{"0":"post-1635","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-financial-ratios","8":"tag-ratios","9":"tag-return-ratios","10":"cs-entry","11":"cs-video-wrap"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Important Profitability Ratios (Return Ratios) - Part 2 - Flattrade Kosh<\/title>\n<meta name=\"description\" content=\"Return ratios help investors to determine how efficiently a company manages its capital for various investments and in generating profit.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/flattrade.in\/kosh\/important-profitability-ratios-return-ratios-part-2\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Important Profitability Ratios (Return Ratios) - Part 2 - Flattrade Kosh\" \/>\n<meta property=\"og:description\" content=\"Return ratios help investors to determine how efficiently a company manages its capital for various investments and in generating profit.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/flattrade.in\/kosh\/important-profitability-ratios-return-ratios-part-2\/\" \/>\n<meta property=\"og:site_name\" content=\"Flattrade Kosh\" \/>\n<meta property=\"article:published_time\" content=\"2021-07-24T14:31:31+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-01-11T02:52:45+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/flattrade.in\/kosh\/wp-content\/uploads\/2021\/07\/profitability-2.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"900\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Flattrade\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Flattrade\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/flattrade.in\/kosh\/important-profitability-ratios-return-ratios-part-2\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/flattrade.in\/kosh\/important-profitability-ratios-return-ratios-part-2\/\"},\"author\":{\"name\":\"Flattrade\",\"@id\":\"https:\/\/flattrade.in\/kosh\/#\/schema\/person\/0df49afdcdc9b8cf2e54f80cbc763e04\"},\"headline\":\"Important Profitability Ratios (Return Ratios) &#8211; 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