The accounting equation - expression from statement of financial position
Assets = liabilities + capital introduced + profit retained in previous periods + profit earned in current period - drawings in current period
Return on capital employed - PI
A ratio that indicates the efficiency and profitability of a company's capital investments.
ROCE = PBIT / Total assets less current liabilities
ROCE should always be higher than the rate at which the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.
Return on equity - PI
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE = PAT and preferential dividends / ordinary share capital + reserve
ROE offers a useful signal of financial success since it might indicate whether the company is growing profits without pouring new equity capital into the business. A steadily increasing ROE is a hint that management is giving shareholders more for their money, which is represented by shareholders' equity. Simply put, ROE indicates know how well management is employing the investors' capital invested in the company. It turns out, however, that a company cannot grow earnings faster than its current ROE without raising additional cash. That is, a firm that now has a 10% ROE cannot increase its earnings faster than 10% annually without borrowing funds or selling more shares. But raising funds comes at a cost: servicing additional debt cuts into net income and selling more shares shrinks earnings per share by increasing the total of shares outstanding.So ROE is, in effect, a speed limit on a firm's growth rate, which is why money managers rely on it to gauge growth potential. In fact, many specify 10% as their minimum acceptable ROE when evaluating investment candidates.
Profit margin - PI
Profit margin = PBIT / sales
Gross profit margin - PI
Gross profit = Gross profit / sales
Asset turnover - PI
Asset turnover = Revenue / Total assets less current liabilities
Gearing ratio - G
There is no limit to what the capital gearing ratio should be, though a benchmark to differentiate low from high gearing is 50%. Above 50%, a company would be highly-geared and if the company’s gearing was rising, it could encounter difficulties in the future in raising additional debt finance unless it could also raise shareholders’ funds, either through a share issue or retained profits.
Gearing ratio = prior charge capital / total capital
The capital gearing ratio measures the proportion of a company’s capital that is prior charge capital. Prior charge capital represents capital carrying a right to a fixed return (e.g., debentures and preference shares). Capital employed represents the long-term funding of a business — ordinary share capital and reserves, preference shares and long-term liabilities and provisions. In group accounts, minority interests would also be included.
G = Gearing
PI = Profitability indicator
PBIT = Profit before interest and taxes
PAT = Profit after tax
EBITDA = Earnings before interest taxes depreciation and amortization