Profitability Analysis Flashcards
Equation: Return on Assets
Net income
÷
Avg total assets
Return on Assets (ROA) Alternate version
Profit Margin * Total Asset Turnover
Aka
[Net income ÷ sales] * [Sales ÷ avg total assets]
Return on Equity Dupont Equation
Profit Margin * Total Asset Turnover * Equity Multiiplier
Aka
[Net income ÷ sales] * [Sales ÷ avg total assets] * [Total assets/total equity]
Return on common equity
(Net income - Preferred dividends)
÷
Avg total shareholders equity - preferred equity
Return on Assets (ROA)
Alternate version 2
Net Income + Interest (1-Tax Rate)
Return on Equity
Alternate version 2
Net Income - Preferred Dividends
Earnings Persistence
continue current income levels into the future that will result in future cash flows
Definition: Sustainable Equity Growth
Max growth rate a firm can have before it has to issue new stocks or debt and increase its financial leverage
Key: continue to reinvest available funds over increased payouts as dividends
What’s the purpose of Variation Analysis?
to see if risk < expected rate of return
(evaluate risk associated with income)
The analysis of the relationship between income taxes and revenue is difficult:
constantly changing regulations from Congress
What factors need to be considered when analyzing quality and stability of revenues?
- Diversification of geographic markets
- Product concentration
- Dependence on a single industry
- Customer concentration
- Dependence on a few expert salesmen
- The sensitivity of demand for products sold to general business clients
- The ability of the company to anticipate customer needs by supplying needed products or product variations
Equation: Return on Stockholders’ Investments
Dividends + Market Value of Earnings retained
÷
of shares * share price
