This document discusses different profitability ratios used to analyze financial performance, including return on sales (ROS), return on assets (ROA), and return on equity (ROE). ROS compares net profit to sales and shows profit as a percentage of each sale. ROA compares net profit or earnings to total assets to measure return on invested capital. ROE compares net profit to equity to measure return to shareholders. The document provides formulas to calculate each ratio and explains they are useful for comparing performance over time, against competitors, and targeted levels that depend on business risk.

1. © Instituto Internacional San Telmo, 2012
DU PONT AND OTHER RATIOS

2. PROFITABILITY RATIOS
Profit and Loss account ratios
How can we compare net profit?
– We can compare it with Sales: Return on Sales (ROS)
– We can compare it with Assets: Return on Assets (ROA)
– We can compare it with Equity: Return on Equity (ROE)

3. PROFITABILITY RATIOS - ROS
Return on Sales is the ratio between Profit and Sales or, in other
words, the percentage of each sale finally obtained as profit.
Why is it useful?
• ROS can be considered as a good approximation of average
return.
• ROS shows us how far/close we are to losing money, i.e. if
small deviations in income or expenses can take the company
to a net loss position.
How do we calculate it?
• The most common formula is to use Net profit over sales
• ROS = Net profit / Sales
• Another option would be to use Profit Before Interest and
Taxes if we want to focus on the business without taking into
consideration the cost of debt and taxes.
What should our targeted
ROS be?
• There are no fixed rules. It will depend on the risk of the
business; the higher the risk, the higher the targeted ROS.
It is very common to compare the company’s ROS
with that of its competitors or benchmark.

4. PROFITABILITY RATIOS - ROS
P&L account:
Return on Sales
ROS = BN / Ventas
Assets
Sales
-COGS
Margin
- Operating Expenses
EBITDA
Amortization
EBIT
Interest
EBT
Taxes
Net Profit
Liabilities
Total Assets
Equity

5. PROFITABILITY RATIOS - ROA
Other names:
ROI: Return on investment.
ROCE: Return on capital employed.
ROIC: Return on invested capital.
This is the Return that the company obtains for each Euro invested in Assets. It provides a good picture of the relationship
between how much shareholders have invested in the company and how much those investments give back to investors.
From this standpoint, it is a critical ratio for shareholders and banks, which help investors to fund assets.
Why is it useful?
• It reflects the return of the business considered as an investment. It does not take into consideration how
the investments have been financed. It is the best financial ratio for determining the quality of the
business.
How do we calculate it?
• It can be calculated in different ways. The easiest way: Net Profit divided by Total Assets.
• ROA = Net Income / Total Assets
• To isolate the investment from financing costs, use instead Net Income (or Net Earnings or Net Profit),
Earnings before Interest and Tax (EBIT):
• ROA = EBIT / Net Assets.
• We can also use Net Assets at the beginning of the year, at the end of the year or the average for the
year.
What is our targeted ROA?
• Again there is no hard and fast rule in this respect. Targeted ROA can be compared with
alternative investments, such as sovereign debt, etc.
It will depend on the business itself, but in any case ROA must be higher that the cost of the resources that we use to finance
our investments.

6. PROFITABILITY RATIOS - ROA
P&L account:
Assets
Sales
-COGS
Margin
- Operating Expenses
EBITDA
Return on Assets
Amortization
EBIT
ROA = NP / Assets
Interest
EBT
Taxes
Net Profit
Liabilities
Total Assets
Equity

7. PROFITABILITY RATIOS - ROE
Return on Equity tells us about the return obtained by shareholders on each Euro
invested in the company. The ratio considers not only shareholders’ disbursements
but also the retained earnings reinvested in the company.
Why is it useful?
• Since ROA tells us about the return on investments without
considering how the investments have been financed, ROE
shows us how much shareholders make on the investments
made in the company.
How do we calculate it?
• Few options
• ROE = Net Profit / Equity
• Again, we can use Equity at the beginning of the year (very
reasonable), at the end of the year or the average of both
figures.
What is our targeted
ROE?
• This is a shareholder decision. A great deal of information is
available in finance literature on the so-called cost of equity. It
is generally accepted that the higher the risk of the company,
the higher the targeted return on equity.

8. PROFITABILITY RATIOS - ROE
P&L account:
Assets
Sales
-COGS
Margin
- Operating Expenses
EBITDA
Amortization
EBIT
Interest
EBT
Taxes
Net Profit
Liabilities
Total Assets
Equity
Return on Equity
ROE = NP / Equity

9. PROFITABILITY RATIOS – ROS, ROA, ROE
P&L account:
Return on Sales
ROS = BN / Ventas
Assets
Sales
-COGS
Margin
- Operating Expenses
EBITDA
Return on Assets
Amortization
EBIT
ROA = NP / Assets
Interest
EBT
Taxes
Net Profit
Return on Equity
ROE = NP / Equity
Liabilities
Total Assets
Equity

10. DUPONT MODEL
ROE
Netprofit Sales Assets
x
x
Sales
Assets Equity
Margin
Rotation
Leverage

11. © Instituto Internacional San Telmo, 2012