Profitability

Question 1

What is the formula for ROA?

Answer 1

Assets

EBIT Sales
————— * ——————
Sales Assets

Profit Margin * Asset Turnover

Question 2

What is the formula for ROE?

Answer 2

Equity

Question 3

What does the ROE measures?

Answer 3

It measures the rate of return to shareholders
[The higher the better]

Question 4

What are the elements of the 3 element division of the ROE? [How they are calulated and what they indicate]

Answer 4

ROS (Return on Sales) = Net income / Sales

Indicator of relative profitability or operating efficiency

“How many cents of profit are generated for every dollar of sale”
__________________________________________________
Asset Turnover= Sales / Assets

“can we maximize the amount of sales we generate with the assets that we have?”
HIGHER=BETTER
__________________________________________________
Leverage = Assets / Equity

It’s positive when the use of debt allows us to increase return on equity (ROE)
It can also decrease

Question 5

What are the elements of the 5 element division of the ROE? [How they are calulated and what they indicate]

Answer 5

Asset Turnover= Sales / Assets

“can we maximize the amount of sales we generate with the assets that we have?”
HIGHER=BETTER
__________________________________________________
Leverage = Assets / Equity

It’s positive when the use of debt allows us to increase return on equity (ROE)
It can also decrease
__________________________________________________
Tax Burden = Net Income / EBT

__________________________________________________
Interest Burden = EBT / EBIT

__________________________________________________
EBIT % = EBIT/Sales

Question 6

What is the formula to check whether Financial Leverage is Favourable or not?

Answer 6

EBT Assets
—————- * ——————
EBIT Equity

If >1 –> Favourable
if =1 –> Neutral
if < 1 –> Unfavourable