5 Profitability ratio every Investor should know

Chitransh Sharma

Lined Circle



Return on assets (ROA) indicates a company's profitability compared to its total assets. A company with a higher ROA is a sounder for investment. Always pick companies with high ROA to invest in.

Return on assets (ROA)

ROA = (Net income/ Average total assets)


EPS is the annual return of a company's defined per-share value. As a rule of thumb, companies with growing earnings per share for the last couple of years are considered beneficial.

Earnings per share (EPS)

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares


ROE is the net income returned as a percentage of shareholders’ equity. It indicates how good is the company at rewarding its shareholders. Always invest in companies with an average ROE for the last three years greater than 15%.

Return on equity (ROE)

ROE= (Net income/ average stockholder equity)


The gain doesn’t always mean increased profits. The profit margin indicates how well a company converts revenue into profits available for shareholders. A company with an unchanging and increasing profit margin is suitable for investment.

Net Profit Margin (NPM)

Profit margin = (Net income/sales)


ROCE calculates the company’s profit and efficiency in terms of the capital it employs. As a rule of thumb, invest in companies with higher ROCE compared to their competitors.

Return on capital employed (ROCE)

ROCE= (EBIT/Capital Employed) EBIT = Earnings before interest & tax

7 valuation ratios Every investor should know

Chitransh Sharma

Lined Circle

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By Chitransh Sharma