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Computerized Investing > First Quarter 2010

Profitability Ratios

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by AAII Staff

Profitability ratios measure a company’s ability to generate earnings relative to its expenses and other costs. For most company profitability ratios, larger values relative to its industry or to the same ratio from a previous period are better.

Two well-known profitability ratios are return on assets (ROA) and return on equity (ROE). Both gauge a company’s ability to generate earnings from their investments, but they don’t exactly represent the same thing.

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Discussion

SAM from CA posted over 3 years ago:

RoE & RoA are ok; but one needs to give more weight to Return on Capital (RoC)or Return on Invested Capital(RoIC), which allows one to judge management's ability to effectively utilize the assets put at its disposal. RoE give management the advantage of using leverage--sometime too much as in CAT (Caterpillar). The difference between the marginal Cost of Capital (CoC) & RoC is what makes the mare go. Say It Again SAM.


Mark from ON posted over 2 years ago:

Excellent point Roland. The article misses it and really should have addressed ROIC.


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