Income Statement Ratios

Question 1

Gross Profit Margin

Answer 1

Margin= percentage

Gross Profit Margin= % Gross Profit/ Total Revenue

Question 2

Net Profit Margin

Answer 2

margin= percentage

Net Profit Margin= Net Income/ Total Revenues

Question 3

Vertical Common-Size Income Statement Ratios

Answer 3

This idea of a vertical common-size income statement ratio is one of commonality to any ratio talking about margins:

***Any Income Statement Account/ Total Revenues= Income Statement common-sized %

Question 4

Fixed Charge Coverage Ratio (SOLVENCY RATIO)*

Answer 4

FCCR= [Earnings before interest and taxes + lease payment (sell,admin expenses) ]/ (lease payment + interest payment)}

Question 5

Operating Profit Margin

Answer 5

Margin means percentage**

operating profit margin = operating profit/ revenue

Question 6

Pretax Margin

Answer 6

Margin means percentage**

Income before Taxes= (EBIT- Interest Expense)

Pretax Margin= Income before taxes/Revenue

Question 7

CV Sales Ratio Margin (Horizontal Common Income S.)

HINT: Has to do with SD

Answer 7

It’s the fact that you are looking at the ‘risk’ for a default in the sales, operating income, net income, and interest coverage

Why? Some companies are very volatile in its sales. This could be due to the fact that there is a switch in demand for the product. ( gas-> electric; 3g-4g switch; phone market)

CV Sales Ratio margin= SD of sales revenue/ mean sales revenue

Question 8

CV Operating Income Ratio (Horizontal Common Income S.)

HINT: Has to do with SD

Answer 8

CV Operating Income Ratio= (SD of Operating Income)/ (mean of all the operating incomes)

Question 9

CV Net Income Ratio (Horizontal Common Income S.)

HINT: Has to do with SD

Answer 9

CV Net Income Ratio= (SD of Net Income)/ (mean of net income)

Question 10

Interest Coverage Ratio

Answer 10

Interest Coverage Ratio= EBIT/ INTEREST