FINANCIAL
STATEMENT ANALYSIS 1-43
EBIT is used in the Basic Earnings Power Ratio to eliminate any
interest payments or tax considerations of the firm. The Basic
Earnings Power Ratio indicates the percentage of
T
OTAL
A
SSETS
generated as
E
ARNINGS
.
Return on Total Assets Ratio
Profitability of
company's assets
By taking
N
ET
I
NCOME AVAILABLE TO
C
OMMON
S
HAREHOLDERS
and
dividing it by the value of all the
A
SSETS
, the analyst calculates the
return on those assets. The Return on Total Assets (ROA) Ratio is
used to determine the return generated by the company on its assets.
For XYZ Corporation, the calculation is:
Return on Total Assets =
(Net Income to Common) / (Total Assets)
=
($6.2) / ($286.9)
=
2.16% of Total Assets
ROA is a common measure of the profitability of a company's
A
SSETS
.
Return on Common Equity Ratio
Return on
stockholder
investment
The Return on Common Equity (ROE) Ratio is a measure of the
rate of return on stockholders' investments. It is calculated by dividing
N
ET
I
NCOME AVAILABLE TO
C
OMMON
S
HAREHOLDERS
by the
T
OTAL
C
OMMON
E
QUITY
capital in the firm.
Return on Common Equity = (Net Income to Common) /
(Common Equity)
= ($6.2) / ($105.8)
= 5.86% of Common Equity
The ROE Ratio tells the analyst the return that common shareholders
had on their investments.