Profitability Ratios: Rates of Return | Financial Statement Analysis

There are two types of profitability ratios: margins and rates of return. While margins tell you about a company's ability to manage its expenses, rates of return scale the company's profit by:
(1) total assets (ROA)
(2) operating assets (RONA)
(3) equity (ROE)
(4) debt and equity (ROIC)

ROA and RONA tell you how good the company was at generating profit after controlling for the company's size. It would be foolish to compare the net income of Walmart to the net income of Dollar General because Walmart is a much larger company; thus, we expect Walmart to have a higher net income. But we can better understand which company is performing better by assessing their ability to generate profit given the assets they have at their disposal.

ROE and ROIC tell you the return the company is earning on capital invested by shareholders (ROE) or shareholders and creditors (ROIC).

Rates of return are therefore an excellent way to compare the performance of two companies, or to analyze a company's performance over time.
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