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Explain Overall Profitability Group Ratios.
Under this group following ratios are calculated which indicates the relationship between the profits of a firm and investment in the firm. These ratios are popularly known as Return on Investment (ROI). The following three ratios are the classification of ROI:
- Return of Assets (ROA) measures the profitability of the investments in a firm. A higher ROA is always preferred.
Formula to calculate ROA = (Net Profit/ Assets) X 100
- Return of Capital Employed (ROCE) measures the profitability of the capital employed in the business. A high ROCE is always preferred as it indicates that the long term funds of owners and creditors are utilized in a better and profitable manner.
Formula to calculate ROCE = (Net Profit + Interest on Long Term Loans) / Capital Employed
- Return on Shareholders’ Funds indicates the profitability of a firm in relation to the funds supplied by the shareholders or owners. This ratio is very important from the owner’s point of view as it helps the firm to know whether the firm has earned enough returns for its shareholders or not. This ratio is calculated in two ways:
Formula to calculate Return on Shareholders Funds = (Net Profit after taxes/ Total Shareholders' Funds) X 100
Formula to calculate Return on Shareholders Funds = {(Net profit after taxes - Preference dividends)/ Shareolder's funds} X 100
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