Return On Investment - ROI

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:

In the above formula "gains from investment or goods", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

ROE
Return on Equity. An indicator of corporate profitability, widely used by investors as a measure of how a company is using its money. There are two ways of calculating ROE: the traditional formula and the DuPont formula. The traditional approach divides the company's net profit after taxes for the past 12 months by stockholders' equity (adjusted for stock splits). But this fails to account for the effect of borrowed funds, which can magnify the returns posted by even a poorly managed company. An alternative approach, developed by the DuPont Corporation, linksreturn on investment (ROI) to financial leverage (use of debt).
This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made a vailable to pay dividends to them.It measures a firm's efficiency at generating profits from every unit of

shareholders' equity (also known as net assets or assets minus liabilities).

Traditional Formula:

ROE = Net Profit After Taxes Stockholders' Equity

DuPont Formul
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Further explanations
 
A ys s, s s he D P e The D P s ts Return On Equity (ROE) into three se ents: y D A ys s, s e ese

* Financial Leverage (calculate using an equity multiplier) * Asset use e iciency (calculate using asset turnover) * Operating e iciency (calculate using the profit margin)

Return On Equity or ROE is calculate with the help of the following formula: ROE = (Net profit/Sales) (Sales/Assets) (Assets/Equity) = (Profit margin) (Asset turnover) (Equity multiplier)

This assessment permits the financial analyst to comprehend where greater or lower return is coming from in relation to other firms in similar industries

The Du Pont Analysis is not useful in some industries, including the banking sector.

    

   

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The Du Pont Analysis is dependent on the accounting identity, which is a formula or statement true by definition. It is utilized in the following types of industries:

* High margin industries * High turnover industries * High leverage industries

The Return On Investment Ratio has been formulated by the Du Pont Analysis for its own purpose. Presently, it is applied by a large number of firms for assessing the efficiency of the usage of assets. It calculates the consolidated results of asset turnover and profit margins.

It is expressed with the help of the following formula:

ROI = Net Income/Sales * Sales/Total Assets = Net Income/Total Assets

The ROE or Return On Equity Ratio is a calculation of the rate of yield to shareholders. Breaking down the ROE into different elements affecting the performance of a company is frequently termed as the Du Pont System.

It is represented with the help of the following formula:

ROE = Net Profit/Equity = Net Profit/Profit Before Tax * Profit Before Tax/EBIT * EBIT/Sales * Sales/Assets * Assets/Equity

Here, net profit is net profit after taxes Equity refers to shareholder's equity EBIT is Earnings Before Interest and Taxes

The breakup represents different types of ratios applied in fundamental analysis:

* The interest burden of the company is (Pretax profit / EBIT). This should be 1.00 for a company with no financial leverage or debt. * The tax burden of the company is (Net profit / Pretax profit). This is the percentage of the profits of the company held back after the payment of income taxes. * The asset turnover or ATO of the company is (Sales / Assets). * The return on sales or ROS or operating profit margin of the company is (EBIT / Sales). This is the operating profit/dollar of sales. * The return on assets or ROA of the company is (Return on sales * Asset turnover). * The leverage ratio of the company is (Assets / Equity), equivalent to the company's debt to equity ratio + 1. This is a calculation method of financial leverage. * The compound leverage factor of the company is (Interest burden * Leverage).

ROE may also be expressed as the following:

ROE = Tax burden * Interest burden * Margin * Turnover * Leverage

or ROE = Tax burden * ROA * Compound leverage factor

Here the profit margin is Net Profit/Sales. Thus the equation of ROE may be reiterated as the following:

ROE = (Net Profit/Sales) * (Sales/Assets) * (Assets/Equity)