Return on Asset (ROA) vs Return on Equity (ROE) vs Return on Investment (ROI)

Financial metrics are key tools to help investors, executives, and analysts assess the financial health, performance and profitability of a company and make informed decisions.

Today, we look at some of these key metrics when looking at profitability, valuation, and debt.

1.1 Net income (or net earnings)
The bottom line on a company’s income statement. It’s calculated by subtracting expenses, interest, and taxes from total revenues.

1.2 Net profit margin
It is the net income as a percentage of overall revenues. It is calculated by dividing the net income by the overall revenue.

1.3 Gross profit
It is the profit that’s left when subtracting the cost of producing and selling the product – the costs of goods sold (COGS).

1.4 Gross profit margin
It shows the gross profit as a percentage of revenues and thus how efficient a company is at making and selling its products.

1.5 Operating profit
It is what’s left when subtracting operating expenses – cost of producing and selling the good and costs of operations – from the revenue. These do not include such items as taxes and interest.

1.6 Operating profit margin
The operating profit as a percentage of the revenues, indicating profitability of core operations before interest and tax.

1.7 EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is a measure of a company’s profitability by excluding the expenses from interest, tax, depreciation and amortization from the net income.

It is a measure of how much profit a company makes per share. To get the figure the preferred dividends are subtracted from the net income, then divided by the number of outstanding shares in a company.

1.9 Return-on-investment (ROI)
Measures how effective an investment is at generating a profit relative to its costs. It is expressed as a percentage of the overall costs by dividing the net value of the investment (value minus cost of the investment) by the cost of investment.

1.10 Return-on-assets (RoA)
It’s a measure of how much profit a business generates from a particular asset by dividing the net income by the total value of the asset or assets.

1.11 Return-on-equity (RoE)
It measures how well a company generates profits using investor funding. It is expressed as the net income divided by the amount of shareholder equity.

📖 Related reading: Assessing Yield, Cash on Cash, and IRR

2.1 Market capitalization
This gives you the total market value of a company (particularly a listed one), by multiplying the market price of a share by the total number of shares.

2.2 Book value
The book value of a business is the total value of the company’s assets found in its balance sheet.

2.3 Price-to-earnings (P/E) ratio
Shows how much investors are willing to pay for a share in the company per dollar of earning. You get it by dividing the stock price by the company’s earnings per share.

2.4 Price-to-book (P/B) ratio
Compares the company’s market value to its book value by dividing the market share price by the book value per share.

2.5 Enterprise value (EV)
Often used in acquisitions, a company’s EV measures its total value by adding its market cap with its total debt minus its cash.

2.6 EV/EBITDA
Often used to compare a company’s value regardless of capital structure by dividing a company’s enterprise value by its EBITDA.

3.1 Long-term debt
Looks at the value of a company’s debt (principal and interest) over one year on the balance sheet.

3.2 Short-term debt
Looks at the company’s total debt in under a fiscal year on the balance sheet.

3.3 Interest expense (or debt service)
It is the cost incurred from borrowing funds on the income statement and any interest incurred from borrowing during the reporting period. It is calculated by multiplying the average balance of the debt by the interest rate.

3.4 Debt-to-Equity Ratio (D/E)
It looks at the overall debt relative to the company’s total financing. The higher the ratio, the higher the weight of the debt on the company’s finances. You calculate by dividing the firm’s total debt with it’s total shareholder equity.

3.5 Debt-to-Asset Ratio
Measures the portion of the company’s assets financed by debt by dividing the company’s total debt by its total assets.

3.6 Debt Service Coverage Ratio
It measures a company’s operating profit relative to its debt service, by dividing net operating income by the interest expense.

3.7 Leverage Ratio
This measurement, which looks at the company’s ability to service its debt relative to its earnings, is calculated by dividing the company’s total debt by its EBITDA.

📖 Related reading: Short Term vs. Long Term Investment Strategies