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•Six Greatest Financial Necessities of Business Life 65

has been involved in a major expansion, it may take some time, measured in years,
to get back to its original profit margin and then exceed it.

Return on assets

This ratio is more important in some industries than others. Basically the clue is the
amount of investment in fixed assets required to create a going concern. In a firm of
consultants, for example, where there are few fixed assets since arguably the main
assets are the people acting as consultants, this ratio will have little relevance. In the
case of a telephone company with the hugely expensive asset of the network, this
ratio is crucial.

Return on shareholders’ funds

This ratio measures management’s ability to use the share capital in the business
efficiently and produce good returns. There is a tendency to use this measure as a
final measure of profitability. In some ways it is a more logical measure of return
than RoCE, since the latter ratio is lowered by the inclusion of loan capital in capital
employed. Some would argue that because the interest on loan capital has already
been deducted from net profit before tax, then the providers of the loan capital have
already had their return and should be excluded from the capital employed. That is
the case with this ratio.

Economic value added (EVA)

This is also known as economic profit, and is defined as the difference between net
profit after tax and the cost of the capital employed in the business. This is said to be