Mock Ratios: Profitability Flashcards
How do you calculate Gross Profit Margin
Gross Profit / Sales
How do you calculate Operating Profit Margin?
Operating Profit (EBIT) / Sales
How do you calculate net profit margin?
Net Profit / Sales
How do you calculate ROA?
Net Income / Total Assets
How do you calculate ROE?
Net Income / Total Equity (inc retained earnings!)
What does the Gross Profit Margin tell us?
The Gross Profit Margin tells us gross profit as a percentage of sales
What does the Operating Profit Margin tell us?
The operating profit margin tells us how efficiently a company is able to generate profit through its core operations. (Therefore the higher the better)
What does the Net Profit Margin tell us
The Net Profit Margin tells us the net income as a percentage of sales. For each dollar in sales the company generates X of profit.
What does Return on Assets tell us?
ROA tells us for each dollar in Assets, how much can a company earn.
What does Return on Equity tell us?
ROE tells us for each dollar of equity invested in the company how much a company might return to shareholders. (Watch out for Treasury Stock here though, which can turn ROEs negative)!
