NISM Series XV : Research Analyst Certification Exam Notes
Page 45 Of 62
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PAT Margin: Shareholders of a business get their dues only at the end, i.e. after paying all stakeholders, including the government. Hence, they would like to know how much of the business generated by the company actually comes their way. This is found by calculating PAT Margin. PAT Margin = PAT/ Net Sales
Return on Equity (ROE): This is the single most important parameter for an investor to start digging for more information about a company. ROE communicates how a business allocates its capital and generates return. An efficient allocator of capital would have high ROE and a poor quality of business would have low ROE. ROE, sometimes also known as Return on Net-worth (RoNW), is calculated as ROE = PAT/ Net-worth
Net-worth = Equity Capital + Reserves & Surplus Higher the ROE, better the firm.
ROE is further decomposed into 3 steps, known as Du Pont Analysis: PAT / Net-worth = (PAT / Net Sales) * (Net Sales / Fixed Assets) * (Fixed Assets / Net-worth) - ROE = Net Profit Margin * Asset Turnover * Equity Multiplier In other words, RoE considers the operating efficiency of the firm, the efficiency with which the assets are used by business to generate revenues and the financial leverage used by the business.
Return on Capital Employed (ROCE): This ratio uses EBIT and calculates it as a percentage of the money employed in the firm by way of both equity and debt. ROCE = EBIT/ Capital Employed - Capital Employed = Total Assets - Current Liabilities or Total Equity + Total Debt. Higher the ratio, better the firm since it is generating higher returns for every rupee of capital employed. Investors can use this to analyse the returns of companies with different sizes in the same industry.
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