# Overall Return Ratios — Owner's Viewpoint

These ratios assess the overall return earned by various capital contributors and by the market.

## 1. Return on Investment (ROI) / Return on Capital Employed (ROCE)

$$\text{Pre-tax ROCE} = \frac{\text{EBIT}}{\text{Capital Employed}}$$

$$\text{Post-tax ROCE} = \frac{\text{EBIT}(1 - t)}{\text{Capital Employed}} = \frac{\text{EAT} + \text{Interest}}{\text{Capital Employed}}$$

Capital Employed = Equity + Long-term Debt = Total Assets − Current Liabilities.

## 2. Return on Net Worth (RONW)

$$\text{Pre-tax RONW} = \frac{\text{PBT}}{\text{Net Worth}}; \quad \text{Post-tax RONW} = \frac{\text{PAT}}{\text{Net Worth}}$$

Net Worth = Shareholders' Funds = Equity Capital + Reserves − Misc. Exp. − Accumulated Losses.

## 3. Return on Assets (ROA)

$$\text{Pre-tax ROA} = \frac{\text{EBIT}}{\text{Average Total Assets}}$$

$$\text{Post-tax ROA} = \frac{\text{EAT} + \text{Interest}}{\text{Average Total Assets}}$$

## 4. Earnings Per Share (EPS)

$$\text{EPS} = \frac{\text{Residual Earnings (EAT − Pref. Dividend)}}{\text{Number of Equity Shares}}$$

Number of Equity Shares = Equity Capital / Face Value per Share.

## 5. Dividend Per Share (DPS)

$$\text{DPS} = \frac{\text{Total Equity Dividend}}{\text{Number of Equity Shares}}$$

## 6. Price-Earnings (P/E) Ratio

$$\text{P/E} = \frac{\text{Market Price per Share}}{\text{EPS}}$$

Indicates how many years of current earnings investors are paying for one share. A higher P/E typically signals expected growth.

## 7. Dividend Yield

$$\text{Dividend Yield} = \frac{\text{DPS}}{\text{Market Price per Share}} \times 100$$

## 8. Book Value Per Share

$$\text{Book Value per Share} = \frac{\text{Equity Shareholders' Funds}}{\text{Number of Equity Shares}}$$

## 9. Market Value to Book Value

$$\frac{\text{Market Price per Share}}{\text{Book Value per Share}}$$

Measures market premium over accounting net worth.

## 10. Tobin's Q Ratio

$$Q = \frac{\text{Market Value of Equity + Liabilities}}{\text{Estimated Replacement Cost of Assets}} = \frac{\text{Market Value of Company}}{\text{Asset Replacement Cost}}$$

Q > 1 → market values the firm above the replacement cost of its assets (good intangible value).
Q < 1 → undervalued or asset-heavy with poor profitability.

Worked example

### Example 1

Example (EPS & P/E): EAT ₹15,00,000; Preference Dividend ₹30,000; 75,000 equity shares of ₹10 each; Market Price ₹20.

Residual Earnings = 15,00,000 − 30,000 = ₹14,70,000
EPS = 14,70,000 / 75,000 = ₹19.60
P/E = 20 / 19.60 = ≈ 1.02 times.

### Example 2

Example (ROCE): EBIT = ₹3,00,000; Tax 30%; Capital Employed = ₹15,00,000.

Pre-tax ROCE = 3,00,000 / 15,00,000 = 20%
Post-tax ROCE = 3,00,000 × (1 − 0.30) / 15,00,000 = 2,10,000 / 15,00,000 = 14%.

### Example 3

Example (Return on Total Assets, Sept 2025-style): EBIT = ₹20,20,000; Tax 33%; Total Assets ₹50,00,000.

PAT = (EBIT − Interest) × (1 − t). If Interest = 35% × 50,00,000 × 10.5% = ₹1,83,750; PBT = 20,20,000 − 1,83,750 = 18,36,250. PAT = 18,36,250 × 67% = ₹12,30,288
Net Profit Margin = 12,30,288 / 55,00,000 = 22.37%
ROA = 12,30,288 / 50,00,000 = 24.61%
Asset Turnover = 55,00,000 / 50,00,000 = 1.1 times
ROE = PAT / Equity = 12,30,288 / 32,50,000 = 37.86%.

⚠️ Common exam mistakes

Using PAT instead of EBIT for ROCE — ROCE is the return to all suppliers of capital, so interest must NOT be deducted.
Forgetting to subtract Preference Dividend when computing EPS.
Confusing Book Value per Share with Face Value per Share — they are different.
In a tax-adjusted ROCE formula, applying tax to interest (which is already an allowable deduction) — use EBIT(1−t) or EAT + Interest, not EBIT × (1−t) − Interest.
Treating Q-Ratio's numerator as only market cap — it must include the market value of all claims (equity + liabilities).

Reference:

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Overall Return Ratios (Owner's Perspective)

Worked example

⚠️ Common exam mistakes