1. Financial statement ratios alone provide direct indicators of good or poor management.
2. The return from investing in the shares of common stock has two components: cash dividends and the change in the market price of the common stock.
3. Theoretical and empirical research has shown that the expected return from investing in a firm relates, in part, to the expected profitability of the firm.
4. Common shareholders have a residual claim on all income after creditors and preferred shareholders receive amounts contractually owed them.
5. When a firm has securities outstanding that, if exchanged for shares of common stock, would decrease basic earnings per share by 30% or more, generally accepted accounting principles require a dual presentation: basic earnings per share and diluted earnings per share.
6. Three measures of profitability for a firm engaging in operations selling merchandise in its stores, to generate net income are: (1) Rate of return on assets, (2) Rate of return on common shareholders’ equity, and (3) Earnings per share of common stock.
7. ROA has particular relevance to the lenders, or creditors, of a firm.
8. The rate of return on common shareholders’ equity (ROCE) measures a firm’s performance in using and financing assets to generate earnings.
9. The term financial leverage describes financing with debt and preferred stock to increase the potential return to the residual common shareholders’ equity.
10. To study changes in ROA, the analyst can disaggregate ROA into the product of two other ratios: the profit margin for ROA ratio and the total assets turnover ratio.