Profitability ratios from the investors point of view

Investing in a stock is a major decision from an individual's point of view.  As an investor, when you decide to invest in some stock, you must know the true worth of the company.

Investors need to look at main profitability ratios as listed below. While these main, the investors must also look at other ratios and aspects as well.

Return on Equity (ROE) is a profitability ratio that indicates company's ability to generate profits using its shareholding investments. It shows management's efficiency that how effectively management has utilized its equity investment.

Normally, ROE >15% is considerably healthy.

ROE= Net Income/ Shareholder's equity*

* Shareholder's equity includes Equity share capital + Reserves and Surplus

Return on Capital Employed (ROCE) is a profitability ratio that indicates company's ability to generate profits at operating level using its capital employed. The ratio majorly comprises of two factors: EBIT and Capital Employed.

ROCE= EBIT/ Capital Employed**

** Capital Employed= Total assets – Current Liabilities

Return on Invested Capital (ROIC) is a profitability measure that indicates company's share of return on its total capital invested.

ROIC= Operating Profit After Tax (NOPAT)/Invested Capital***

*** Invested Capital= long term debt+ equity