Evaluating Profitability

Question 1

Profit Margin Ratio

Answer 1

-Profitability
M. net income earned per every $1 in sales

= net income / net sales revenue

high # => Good

Question 2

Rate of Return on Total Assets

Answer 2

-Profitability
M. company’s success to use assets to earn profit
-> can finance assets with debt (borrowed + int) or equity (stockholders)

= (net income + interest expense) / Avg. Total assets

Question 3

Asset Turnover Ratio

Answer 3

-Profitability
M. how well a company uses assets to generate sales revenue

= net sales revenue / Avg. total assets

~ Typically H Gross Profit = L Asset Turnover
^ and vice versa

Question 4

Return on Equity

Answer 4

-Profitability
MOST POPULAR
M. how much income is earned for each dollar invested by common stockholders

= (net income - preferred dividend) / Avg. Stockholder’s Equity

Question 5

Earnings per Share (EPS)

Answer 5

-Profitability
WIDELY QUOTED on FINANCIAL STATEMENTS
~FASB requires EPS on Income Statements
M. net income for each outstanding stock

= (net income - preferred dividend) / actual number of shares outstanding