Profitability Ratios Flashcards
Measure the company's ability to generate profits from its resources (assets) rather, information on how well the company generates operating profits and net profits from its sales
Net Profit Margin
Net Income / Revenue
Gross Profit Margin
Gross Profit / Revenue
Operating Profit Margin
Operating Income / Revenue or EBIT / Revenue
Pretax Margin
EBT / Revenue
Return on Assets (ROA)
Net Income (Net income + interest expense [ 1- tax rate]) / Average Total Assets
Measures profitability relative to funds invested in the company by common stockholders, preferred stockholders, and suppliers of debt financing
*Use the latter form which adds back gross interest expense (not net interest expense) *may be manipulated when firms ‘manage’ the balance sheet. - lower asset values (understate assets to appear less solvent in order to negotiate concessions w/ creditors and other interested parties) will result in a higher ROA and a higher asset turnover ratio
Operating Return on Assets
Operating Income/Average Total assets or EBIT/average total assets
Return on total Capital
EBIT/Average Total Capital
Return on Equity
Net Income/Average Total Equity
Return on Common Equity
Net Income - Preferred Dividends / Average Common Equity or Net Income Available to Common / Average Common Equity
