P2A.2.5 Financial Ratios - Profitability

Question 1

Profitability Ratios

Answer 1

Measures the financial performance of a company.

Question 2

Types of Profitability Ratios

Answer 2

1. Gross Profit Margin %
2. Operating Profit Margin %
3. Net Profit Margin %
4. EBITDA Margin %
5. Return on Assets
6. Return on Equity

Note: whenever a ratio has a component from the balance sheet, it refers to average balance.

Question 3

Gross Profit Margin Percentage

Answer 3

1. Ratio of gross profits to sales

2. Mark-up percentage on cost or the profit percentage before deducting operating expenses.

Question 4

Gross Profit Margin Percentage Formula

Answer 4

GP % = Gross Profit / Sales

GP % = Sales - COGS / Sales

Question 5

Operating Profit Margin Percentage

Answer 5

1. Ratio of operating income to sales.

2. Measures the return of operating income to sales.

Question 6

Operating Profit Margin Percentage Formula

Answer 6

OP % = Operating Income / Sales

OP % = Sales - COGS - Operating Expenses / Sales

Question 7

Net Profit Margin Percentage

Answer 7

1. Ratio of net income to sales

2. Measures the return of net profit to sales.

Question 8

Net Profit Margin Percentage Formula

Answer 8

NP % = Net income / Sales

Question 9

EBITDA Profit Margin Percentage

Answer 9

1. Ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) to sales.
2. Measures the return of EBITDA to sales.

Question 10

EBITDA Margin Percentage Formula

Answer 10

EBITDA % = EBITDA / Sales

Question 11

Return on Assets (ROA)

Answer 11

1. Ratio of net income to average total assets.
2. Measures net income (profitability) in relation to total assets used to generate that income.

ROA = Net income / Average total assets

Question 12

Return on Equity (ROE)

Answer 12

1. Ratio of net income to average equity.
2. Measures the return of net income to average equity.

ROE = Net income / Average equity