Margins measure profit per dollar of revenue. Return ratios measure profit per dollar of CAPITAL — and capital is what shareholders are putting at risk. A company with 10% margins but 30% return on capital is creating enormous value because it produces profits without needing much capital.

A company with 30% margins but 10% return on capital looks profitable on the income statement but consumes capital inefficiently. Return on capital is the single most important quality metric in fundamental analysis, and the one that most consistently separates wonderful businesses from merely profitable ones. Three primary return ratios.

ROE (Return on Equity) = Net Income ÷ Shareholders' Equity. Measures profit on the owners' equity capital. 15%+ is good, 20%+ excellent.

Inflated by leverage — a heavily-debted company can show high ROE on a thin equity base. ROA = Net Income ÷ Total Assets.