## Profitability Ratios — Return on Assets / Investments
This family relates earnings to the funds/assets invested in the business.
### A. Return on Investment (ROI)
ROI is the percentage return on funds invested in the business by its owners — it tells the owner whether the effort put into the business has been worthwhile by comparing earnings against investment.
$$\text{ROI} = \frac{\text{Return / Profit / Earnings}}{\text{Investment}} \times 100$$
Depending on the concept of "investment," there are three broad categories:
1. Return on Assets (ROA)
2. Return on Capital Employed (ROCE)
3. Return on Equity (ROE)
### i. Return on Assets (ROA)
Measures profitability in terms of the relationship between net profit and the assets employed to earn it.
$$\text{ROA} = \frac{\text{Return}}{\text{Average Assets}} \times 100$$
- Note 1 (Return): could be EBIT, EBIT(1−t), EAT, or EAT + Interest.
- Note 2 (Assets): could be Average Total Assets, Average Tangible Assets, or Average Fixed Assets. If average figures are unavailable, total figures may be used.
### ii. Return on Capital Employed (ROCE)
A variation of ROI. As a rule, ROCE should always be higher than the rate at which the company borrows.
$$\text{ROCE (Pre-tax)} = \frac{\text{EBIT}}{\text{Capital Employed}} \times 100 \qquad \text{ROCE (Post-tax)} = \frac{\text{EBIT}(1-t)}{\text{Capital Employed}} \times 100$$
Sometimes also calculated as:
$$= \frac{\text{EAT} + \text{Interest}}{\text{Capital Employed}} \times 100$$
### Doubt Buster
Intangible assets (assets with no physical existence — goodwill, patents, trademarks) should be included in the capital employed.