Exam Flashcards
How do you calculate the profit margin ratio within the DuPont Framework?
Net income/Sales
Suppose the profit margin for Cardullo’s Gourmet Shoppe, Inc for Q1 was 4.99% and Q2 was 10.57%. Which of the following statements can you conclude regarding Cardullo’s?
Cardullo’s does a better job in cost control in Q2 than in Q1.
Profit margin is the percentage of selling price that turned into profit. Cardullo’s could increase its profit by reducing costs, thus increase its profit margin.
The profit margin for East Corp. for each year from 2011 to 2013 is listed below.
2011: 7.13%
2012: 7.68%
2013: 8.14%
What could explain the trend in the ratio?
The variable costs decreased due to an improvement in technology.
Lower variable costs would result in a higher profit margin.
An increase in the sales price due to higher demand resulting from a successful marketing campaign.
Increase in sales price would result in a higher profit margin.
Gross Profit Margin =
GROSS PROFIT / SALES
(Revenue - Cost of Sales) / Revenue = Gross Profit Margin
If overall Amazon’s gross profit % trend is increasing while the profit margin trend is decreasing. What is a reasonable explanation for the inverse trends?
Higher demand has allowed Amazon to increase their prices, while higher overhead expenses have been hurting overall profits.
Higher selling prices would result in a higher gross profit margin, but increasing operating expenses could eat away the profits before they hit the bottom line.
If the cost of inventory decreased, Amazon could make more money off of each item it sold. What would happen to the GROSS PROFIT MARGIN?
it would increase
Suppose the gross profit margin for Cardullo’s Gourmet Shoppe, Inc for Q1 was 47.25% and Q2 was 47.70%. Which of the following is a reasonable explanation for the change in the ratio?
Cardullo’s negotiated with vendors and successfully reduced overall inventory prices.
If the cost of inventory decreased, Cardullo’s could make more money off of each item it sold.
EBIAT, is a measure of
is a measure of how much income the business has generated while ignoring the effect of financing and capital structure, or the proportion of debt that the business has. As the name implies, interest expense, which is included on the income statement, is added back, and income tax expense is calculated and subtracted based on earnings before interest.
Asset turnover =
Revenue / Average Assets
to understand how efficiently a business is managing its inventory levels we calculate
inventory turnover = COGS/ AVG inventory
A higher inventory turnover represents more efficient inventory management.
Days Inventory =
Average inventory / (COGS/365)
Or
365 / Inventory Turnover
AR turnover
AR turnover represents the number of times per year a company is collecting its outstanding accounts receivable. Uncollected receivables represent cash that is tied up and can’t be used for other purposes. An AR turnover that is too low could indicate that the business’ customers are having trouble paying.
= CREDIT SALEES / AVG ACCOUNTS RECEIVABLE
The average collection period, sometimes referred to as Days Sales Outstanding or Days Sales in Receivables =
the average number of days it took for a business to collect payment from a customer.
We can calculate the average collection period by first finding the average credit sales per day. Dividing the average accounts receivable balance by credit sales per day will leave us with the number of days sales our accounts receivable balance represents, or the average collection period.
Assuming all sales were made on credit, Credit Sales per Day can be calculated as Sales / 365. Again, in the absence of information about credit sales, we will often simply use sales as a substitute anyway.
Accounts Payable Turnover
Cost of Sales / Average Accounts Payable =
Interest Coverage Ratio
The interest coverage ratio, also known as times interest earned, is a good way to gauge how capable a business is of making the interest payments on its debt.
= EBIT/ INTEREST EXPENSE
