Chapter 18 - Measures and Theory Flashcards
What does ROI measure?
Measures profit (return) earned per dollar of capital invested by the owner
What does a high debt ratio mean if ROI is low?
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
What does ROA measure?
Measures 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
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
What does NPM measure?
Measure the percentage of Sales Revenue that is retained as Net profit.
How are Net Profit Margin, Asset Turnover, and Return on Assets linked?
Return on assets (and therefore profitability) depends on the ability of the firm to earn revenue (ATO) and to control expenses (NPM)
What does GPM measure?
Measure the percentage of Sales revenue that is retained as Gross Profit
