Profitability Ratios

Legendary investor Warren Buffet is often quoted as advising investors to analyze purchasing a company’s shares as if you were buying the whole company.

One of the items you’d probably evaluate if you were actually buying a company is your return on investment.

return on investment = annual profits/total investment

For instance, your return on investment is 10 percent if you bought a company with a $100,000 cash investment and you made $10,000 in profits annually (10,000/100,000).

Return on Equity

ROE measures a company’s returns on its shareholders’ investments in the same manner. ROE is a company’s annual net income divided by its shareholders equity.

ROE = net income/shareholder’s equity

ROE is widely reported, and ...

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