The Corporate Finance Institute
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B. Margin Ratios
Margin ratios represent the company’s ability to convert sales into profits at various degrees of measurement. Margin ratios typically look at certain returns when compared to the top line (revenue). Typically, it compares income statement items.
Gross Margin Ratio Operating Profit Margin Net Profit Margin
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Corporate Finance Institute
Financial Ratios
Return on Equity Overview Return on equity is a measure of a company’s annual return (net income) divided by the value of its total shareholders’ equity, expressed as a percentage (e.g. 10%). Alternatively, ROE can also be derived by dividing the firm’s dividend growth rate by its earnings retention rate (1-dividend payout ratio). There are several ROE drivers, and we will further breakdown the ratio.
Formula
Interpretation ROE provides a simple metric for evaluating returns. By comparing a company’s ROE to the industry’s average, it is possible to pinpoint a company’s competitive advantage (or lack of competitive advantage). As it uses net income as the numerator, return on equity (ROE) looks at the firm’s bottom line to gauge overall profitability for the firm’s owners and investors.
As an investor, this is an essential ratio to look at as it ultimately determines how attractive an investment is. Return on equity is a product of asset efficiency, profitability, and financial leverage.
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