Assessing Profitability

What are the key indicators of profitability?

1. Return On Equity (ROE)

• Profits earned compared to total shareholder equity on Balance Sheet.
• High ROE => ability to generate cash internally.
• Higher, the better.

2. Return On Investment (ROI)

• Net Profit / Total Assets.
• Overall effectiveness to generate profits from total investment in assets.
• Highter, the better.

3. Net Profit Margin

• Net Profit / Net Sales
• % of each sales dollar left after all expenses.
• Highly industry dependent.
• Higher, the better.