Profitability measures Flashcards
Gross profit margin def
measures how much of each sales dollar is available to cover operating expenses and provide profit
Gross profit margin formula
Gross profit / net sales
Net profit margin
measure how much of each sales dollar ends up as net income.
Net income / net sales
Return on total assets (return on investment) def
measures the rate of return on total assets (or total investments) and indicates the efficiency with which invested resources are used.
ROA = net income / total assets
Return on total assets (ROI) equation
(net income + interest expense + interest tax savings) / average total assets (or avg total investment)
ROI = Net income/total investment. OR
ROI = Asset turnover x Profit margin on sales.
(asset turnover = sales /inv) (Profit margin on sales = net income/sales)
return on owners’ equity
net income / avg stockholders’ equity.
(assets - debts = owners equity)
Measures the rate of return on all SH investment
Return on Common Equity
(Net income - Preferred Dividend) / avg CS equity.
Measures the rate of return on CS equity.
Residual income
Measures the excess net income over the dollar amount of the required rate of return on avg investment.
Residual income = Net income - required dollar return.
(required dollar return = avg invested capital x hurdle rate)
OR
RI = Operating income - imputed charge
Economic Value Added
EVA = Earnings before interest - (rate of return x (LT debt + SHE))
represents the residual income that remains after the cost of all capital including equity capital, has been deducted.
Earnings per Share
Measures the income earned per avg share of CS.
EPS (basic) = (net income - current preferred dividend) / weighted avg number of CS outstanding.
Price/earnings ratio
Measures the price of a share of CS relative to its latest EPS.
Market price for a CS / earnings per common share
Debt to equity ratio
Total liabilities / total SHE
Owner’s equity ratio
SHE / total assets
Debt ratio
Total liabilities / total assets
Book value per common share
Common stock equity / # of CS outstanding
