2.1 Profitability

Question 1

Gross profit margin ratio

Answer 1

Net Sales - cost of good sold/

Net sales

Question 2

Operating profit margin

Answer 2

Operating income/
Net sales

EBIT/
Sales

Question 3

Net profit margin ratio

Answer 3

Net income (including interest expense and taxes)/
Net sales

Question 4

EBITDA margin

Answer 4

EBITDA/

Net Sales

Question 5

Return on assets

Answer 5

Net income/
Average Assets

Also: ROE x (1-Debt Ratio)

Debt
——-
Assets

Question 6

Return on equity

Answer 6

Net income/
Average total equity

Also:

ROA = ROE x (1 - Debt Ratio)

Question 7

Return on Equity

Dupont model

Answer 7

Starts with the standard equation for our away and breaks it down into two component ratios, one that focuses on income statement one that relates income to balance sheet

Net Income/ x Sales/. x
Sales Avg Tot Assets

Avg Total assets/
Avg total Equity

Avg Profit Margin x. Asset Turnover x
Equity multiplier

• The net profit margin component examined to companies efficiency and generating earnings for sales it measures the amount of earnings that the company makes from every one dollar off sales
• The asset turnover component is how efficiently the company is deployed the totality of its resources to generate revenues. Measures how much the sales company generates from one dollar of assets
• The equity multiplier measures a company’s financial leverage. Financial leverage means a company realize more on debt to finances assets. So on one hand by raising capital with that the company can increase its equity multiplier and improve this return on equity. But on the other hand, taking on additional debt me worse in the company solvency and increase the risk of going bankrupt

Question 8

Sustainable growth rate

Answer 8

ROE x (1-dividend payout ratio)

This ratio measures a potential growth of a firm without borrowing additional funds.

The retention ratio, or the difference of one and a dividend payout ratio, is the portion of the income kept to grow the firm

Difference difference in the two denominators is the total liabilities. ROE will therefore always be greater than ROA

Question 9

Retention Ratio

Answer 9

The portion of income kept To grow with a firm (not paid out as dividends)

1 - dividend payout ratio

Dividends/
Net income

Question 10

Return on assets

Dupont model

Answer 10

ROA

Profit margin x Asset turnover

Net Income/. X Sales/
Sales. Average assets

Emphasizes that shareholder return maybe explain in terms of both profit margin and efficiency of asset management

Question 11

Dividend Payout Ratio

Answer 11

dividends
—————
Net Income

Question 12

Asset Turnover

Answer 12

Net Sales
—————-
Average Assets