We refer to the ratios covered in this post as activity ratios. These ratios measure the efficiency with which the company is managing its operating working capital. This post is the fourth in a series about financial ratios. We previously explored return on invested capital, return on common equity, and other profitability ratios. To reiterate […]
Activity Ratios Introduction Read More »
We devoted previous posts to two important profitability ratios: return on invested capital (ROIC) and return on common equity (ROCE). These two metrics are arguably the most important metrics for determining the economics of a business and how well management is utilizing the company’s resources. However, there are several other ratios which can help managers
Profitability Ratios Introduction Read More »
Previously we introduced a profitability ratio known as return on invested capital (ROIC). This ratio measures the amount of operating profit per dollar of total capital employed in the firm. But equity investors are often interested in the earnings generated on shareholder capital only. For this, we use a measure called return on common equity
Understanding Return on Common Equity Read More »
In a previous post, we discussed a metric called return on invested capital (ROIC) and its variant, return on incremental invested capital (ROIIC). ROIC measures the after-tax operating earnings generated per dollar of average total capital, while ROIIC measures the incremental operating earnings generated per dollar of additional capital employed in the business. These measures
The Hurdle Rate – Understanding the Cost of Capital Read More »
One mistake I see many small business owners make is to focus on the “bottom line”, i.e., the profits of the business, while ignoring the amount of capital necessary to generate those profits. Profit as a stand along measure tells us relatively little about the economics of the business. For example, consider two companies each
Managing Your Business for Profitability – Understanding Return on Invested Capital Read More »
In the investment world we constantly hear about the importance of “thinking like an owner,” particularly in reference to the short holding periods of most money managers. However, in the small business world, the opposite is often true – business owners who fail to think like capital providers. If you are a small business owner,
Financial Management: A Brief Guide for Small Businesses Read More »
