Do Stocks With Higher Profitability Earn More? by Bargain Value
[munger]
Profitability tells us how good a company manages its equity/assets. There are many formulas to count profitability, but they all are quite correlated with each other. Main 3 formulas are:
Return on Equity (ROE) = annual net profit / equity
Return on Assets (ROA) = annual net profit / total assets
Return on Capital Employed (ROCE) =
= annual operating profit / (total assets – current liabilities)
Capital employed is something between equity and assets. It gathers only those assets, which can be used to create profits (that is why we subtract current liabilities). ROCE uses operating profits instead of net profits, which I find as a benefit, because they are less prone to manipulations...
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