Chapter 18 - Financial Indicators (Profitability) Flashcards
How do you calculate Return on Owner’s Investment (ROI)
Net Profit/Average Capital * 100
What does ROI measure?
Measure profit (return) earned per dollar of capital invested by the owner
How do you calculate debt ratio?
Total Liabilities/Total Assets * 100
What does a high debt ratio say about ROI?
It means the business relies more on liabilities so there ROI will be lower
What does debt ratio measure?
Measures the percentage of a firm’s assets that are financed by liabilities
How do you calculate Return on Assets (ROA)?
Net Profit/Average Total Assets * 100
What does ROA measure?
Measure Net Profit per dollar of assets controlled by the business.
What can cause a change in ROA (think simple)?
If assets change, or if net profit change
How do you calculate Asset Turnover (ATO)?
Net Sales/Average Total Assets
What is the relationship between ROA and ATO?
ROA deals with net profit while ATO deals with net sales
What is the difference between ROA and ATO?
The only difference is the one between Sales and Net Profit, which is expenses
What does ATO measure?
Measures the number of times in a period the value of assets is earned as sales revenue
What does a high ATO mean?
That a business is more capable of using its assets to earn revenue
How do you calculate Net Profit Margin (NPM)?
Net profit/Net Sales * 100
What does NPM measure?
Measure the percentage of Sales Revenue that is retained as Net profit.
