# Financial Terms “R” ## Ratio Analysis

Ratio analysis is analyzing a company based on calculating a set of financial ratios. Common financial ratios include the current ratio, return on assets, and debt to equity ratio.

## Return on Assets

Return on assets (ROA) is a financial ratio on how profitable a company is based on its assets. The most common formula divides net income by total assets. ROA is shown as a percentage.

Assume a company has net income of \$5,000 and total assets of \$40,000. The ROA is 5,000 / 40,000 = 12.5%

## Return on Equity

Return on equity (ROE) is a financial ratio on how profitable a company is based on its stockholders’ equity. The ROE formula divides net income by total equity. ROE is always presented as a percentage.

Assume a company has net income of \$5,000 and total equity of \$25,000. The ROA is 5,000 / 25,000 = 20.0%

## Return on Investment

Return on investment (ROI) is a financial ratio on how profitable a project is based on its initial investment. The ROI formula divides net profit by total investment. Net profit equals Current Value of Investment + Income – Initial Investment and Costs. ROI is always shown as a percentage.

Assume Zebra Co. purchased stock for \$50,000. After one year, the stock paid dividends of \$1,500 and was worth \$55,000. The net profit is 55,000 + 1,500 – 50,000 = 6,500. So, the ROI is 6,500 / 50,000 = 13.0%

## Revenue

Revenue occurs when a business receives assets by selling a product or service. Revenues are one of the five types of accounts. Revenues are included on the income statement. Revenues are also called income or gains.

## Rule of 72

The Rule of 72 is an estimate of how fast an investment doubles given a fixed interest rate. It approximates a compound interest problem of an account that grows exponentially. Rule of 72 formula: Years to double = 72 / Interest Rate.

For example, if an account earns 8%, how fast will the account double? 72 / 8 = 9 years. So at 8%, an investment would double in approximately 9 years. Note: the 8% is used in the formula as a whole number, or 8.

Jeff Mankin

Jeff Mankin teaches financial literacy. His website is FinallyLearn.com.