ROE (Return on Equity) % = Net pro t / Shareholder’s

equity
Measures how much shareholders earned on the investment
they made in the company.
Net Pro t Margin % (or Bottom Line Margin) = Net pro t
/ Revenues
Indicates the percentage of pro t that shareholders can retain
from revenues.
Payout Ratio % = Dividends per share / Earnings per
share = Dividends / Net pro t (of the year before)
Represents the percentage of net pro t that is returned as cash
to shareholders. Higher values are not always better.

Sustainable Growth Rate = ROE × (1 − Payout Ratio)

This represents the internally generated (and retained) growth
potential of the company.
Earnings Per Share = Net pro t / Number of Common
Shares
Indicates the pro t for each single share.

ROA (Return on Assets) % = Operating pro t (EBIT) /

Total Assets
Measures the ability of managers to generate operating pro t
using the company’s assets for continuing business operations.
It is also used in managers’ internal evaluation.
ROI (Return on Invested Capital) % = Operating pro t
(EBIT) / (Total Assets − Non-Financial Liabilities)
Non- nancial liabilities are those without an explicit interest
rate. ROI measures the ability of managers to generate pro t
from the transformation of inputs into outputs.
ROCE (Return on Capital Employed) % = Operating
pro t (EBIT) / (Equity + Long-term Debt)
This is a variation of ROI to better characterize the speci c
components of invested capital.
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 ROACE % (Return on Average Capital Employed) =
Operating pro t (EBIT) / (Average Equity + Average Long-
term Financial Debt)
• Average Equity = (Eₜ + Eₜ₋₁) / 2
• Average Long-term Financial Debt = (LTₜ + LTₜ₋₁) / 2
Operating Pro t Margin % = Operating pro t (EBIT) /
Revenues
EBITDA Margin % = EBITDA / Revenues
• EBITDA = EBIT + Depreciation & Amortization
This further de nes pro t components related to continuing
business operations and highlights the impact of depreciation
and amortization of assets.

Quality of Operating Earnings % = CFFO / EBIT

This ratio shows the proportion of EBIT earned as cash.
Asset Turnover Ratio % = Revenues / Total Assets
This ratio identi es the ability to manage assets for generating
revenues. A higher ratio indicates higher asset productivity.

Debt-to-Equity Ratio = Liabilities / Shareholders’ Equity

• Liabilities include current and non-current liabilities
(TL).
• Alternatively, in some cases: D = Financial Debts.
Interest Cover Ratio % = Operating Income / Interest
Expenses
Cost of Debt % = Interest Expenses / Financial Debt
• Financial Debt refers to debt with explicit interest
rates.
4. Effective Tax Rate % = Taxes / Pre-Tax Pro t
• Measures the effective weight of taxation on the
company’s pro t.
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 ROE (Return on Equity) % = Net Pro t / Shareholders’
Equity
• A key indicator tracing the pro tability of the overall
enterprise, encompassing:
• Operating activities
• Financial activities
• Fiscal and discontinuing operations.
Financial Leverage Formula for ROE:
ROE = (Net Pro t / Shareholders’ Equity) = ROI + (D/E) × (ROI
− r) × s
• ROI: Return on Investment
• D/E: Debt-to-Equity ratio
• r: Interest rate on debt
• s: Leverage multiplier.

Financial Leverage (s): Discontinued Operation and Taxes

Component
s = Net Pro t / Pro t Before Tax From Continuing
Operations
s = (Net Pro t / Pro t From Continuing Operations) ×
(Pro t From Continuing Operations / Pro t Before Tax From
Continuing Operations)
s = Incidence of Discontinuing Operations × Incidence of
Taxes = d × t
• d: Incidence of Discontinuing Operations
• t: Incidence of Taxes
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 Financial Leverage Considerations
ROE Formula:
ROE = ROI + (D/E) × (ROI − r) × s
• ROI: Return on Investment
• D/E: Debt-to-Equity Ratio
• r: Interest rate on debt
• s: Financial leverage multiplier

Key Considerations:
• If ROI > r: An increase in D (debt) leads to an increase
in ROE.
• If ROI < r: An increase in D (debt) leads to a decrease
in ROE.
Conclusion:
• An increase in nancial leverage is not always
bene cial, as its impact depends on the relationship
between ROI and the interest rate (r).

Financial Leverage: Alternative Formulations

General Formula:
ROE = f(D/E)
• D: Financial Liabilities or Total Liabilities
• E: Equity
. Key Points:
• This is not the only available approach to nancial
leverage; other formulations exist, connecting speci c
indicators with diverse metrics.
• Consistency in metrics (coherence) is critical when
including diverse indicators in the formula.
• The nancial leverage formula enables calculating
ROE as a function of the Debt-to-Equity ratio (D/E).
Additional Context:
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 • Alternative formulations include approaches based on
ROA, the Du Pont Approach, and leverage analysis for
constructing risk/operational ef ciency matrices.

Financial Leverage: Alternative Formulation Based on ROA

General Formula:
ROE = f(TL/E)
• TL: Total Liabilities
• E: Equity
Assumptions:
• Financial Interests − Financial Income = Net Financial
Interests (I*).
• Net Pro t = EBIT − I* − Taxes.
ROE Formula:
ROE = (EBIT − I* − Taxes) / E
• EBIT: Earnings Before Interest and Taxes
• I*: Net Financial Interests
• Taxes: Tax amount

DSO (Days Sales Outstanding) = (Account Receivables /

Net Sales) × 365
• Represents the average collection time of trade
receivables.
DPO (Days Payables Outstanding) = (Account
Payables / Net Purchases) × 365
• Represents the average collection time of trade
payables.
Additional Notes:
• These are rough measures of the company’s
ef ciency in managing payables and receivables.
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 • NET refers to VAT-excluded values: Net Sales = Sales
× (1 − VAT).
• Ideal situation: , but this is not always the case.

Cash-Flow-to-Debt = CFFO / Financial Debt

• Financial Debt: Liabilities with a speci c and explicit
interest rate.
Short-term Debt Coverage = CFFO / Current Financial
Debt
Capex Coverage = CFFO / CAPEX
• CAPEX: Cash ow used in investing in tangible and
intangible assets (from the Cash Flow Statement).

Economic Margin = (CFFO / Invested Capital) − k

• k: Cost of capital or required rate of return.
CFROI (Cash Flow Return on Investment) = CFFO /
Market Value of Invested Capital
• These ratios represent cash-based performance
indicators focused on the ef ciency and pro tability of
capital usage.

Economic Margin (EM) = (CFFO / Invested Capital) − k

• CFFO: Cash Flow from Operations
• Invested Capital: Total capital invested in the business
• k: Cost of capital or required rate of return

This metric measures the cash-based pro tability of the

company relative to the cost of capital.
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 RI (Residual Income) = EBIT − (k × Invested Capital)
• EBIT: Earnings Before Interest and Taxes
• k: Cost of capital
• Invested Capital: Total capital invested in the
business
EVA (Economic Value Added) = EBIT’ − (k × Invested
Capital’)
• EBIT’: Adjusted EBIT after corrections
• Invested Capital’: Adjusted invested capital
EVA (Alternative Formula) = EBIT × (1 − t) − (k ×
Invested Capital’)
• t: Tax rate

These metrics measure the economic pro tability of the

business after considering the cost of capital and tax impacts.
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