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Rate of return ratios |
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Rate of return ratiosRatios that measure the profitability of a firm in relation to various measures of investment in the firm.Rate of return ratios Similar MatchesExpected future returnExpected future returnThe return that is expected to be earned on an asset in the future. Also called the expected return. Return on capital employedReturn on capital employedA measure of a company's profitability. It may be defined as:Earnings before interest and tax divided by total capital employed plus short term borrowings minus total intangibles.ROCE takes all the assets employed in the business, including borrowings, and measures the return the company made on them. If a company has a low ROCE, it is using its resources inefficiently, even if its profit margin is high.Calculation: multiply operating profit by 100, and divide the result by total capital employedExample: Company A made an operating profit of £897m on total capital employed of £4,342m. ROCE was therefore (897 x 100) / 4,342= 20.66%Yardstick: A company's ROCE should be higher than the return on gilts (the benchmark for a risk-free investment return). And unless it is higher than the cost of borrowing, any increase in the company's borrowings or the general level of interest rates will reduce shareholders' earnings. A ROCE of 20% or more is considered very good. Certainty Equivalent ReturnCertainty Equivalent ReturnThe certain (zero risk) return an investor would trade for a given (larger) return with an associated risk. For example, a particular investor might trade an uncertain expected 4% active return with 6% risk, for a certain active return of 1.5%. Average rate of return (ARR)Average rate of return (ARR)The ratio of the average cash inflow to the amount invested. Separate tax returnsSeparate tax returnsTax returns of married persons who choose to file their returns individually, usually because this approach produces lower overall tax payments. Further SuggestionsRisk return tradeoffIncreasing returns to scale Return on equity (ROE) Return T period holding period return Consolidated tax return Expected return beta relationship Leveraged required return Maximum expected return criterion (MERC) Inheritance tax return Economic rate of return Risk adjusted return Market return Real rate of return annual return Specific Return Realized return Joint tax return Expost average rate of return Maximum return criterion (MRC) Portfolio internal rate of return Total return for calendar year real return Multiple rates of return total return |
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