J evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement;

Question 1

Fundamental financial ratios based on the IS

Answer 1

Gross Profit Margin: Dollars kept after expenses: Rev-Cogs/Rev: GP/Rev

Net Profit Margin: NI (GP[rev-cogs])-op-int. n taxes)/Rev : Profit generated after considering all expenses.

How to use either? Compare both over time and with industry peers

Question 2

Why margin ratios?

Answer 2

To quickly measure GP and NP margins

Question 3

How to inc. GP margins

Answer 3

+Prices, or -Production costs

Product differentiation (brand names, quality, tech, patent protection) may lead to +P

Question 4

Margin tip and trick!

Answer 4

Any subtotal found in the income statement can be expressed as a % of revenue

Sub totals found in IS: Op profit, pretax acct. profit, etc

Op. Prof/ revenue = Operating profit margin
Pretax acct profit / rev = Pretax margin