Profitabilty For Finance

Question 1

Net Profit Margin

Answer 1

Earnings/Revenue

Measures: percent of revenue left after all expenses, taxes, and costs have been deducted

Good = the higher the better

Question 2

ROE

Answer 2

Earnings/Equity

Measures: How effectively a company used its assets to generate profit

Good = Higher means better asset utilization

Question 3

Earnings Yield

Answer 3

Earnings per Share/ Price per Share

Measures: percentage returns generated on earnings relative to stock price (profitability compared to market value)

Good = higher the better

Question 4

P/E Ratio

Answer 4

Price per Share/Earnings per share

Measures: how much investors are willing to pay per dollar of earnings

High P/E = indicates overvaluation

Low P/E = indicates undervaluation

Question 5

DuPont Equation (ROE Breakdown)

Answer 5

(Profit Margin) (Asset Turnover) (Equity Multiplier)

Measures: Helps understand what is driving a companies ROE (using profit margin, asset turnover, and equity multiplier)

High ROE: indicates strong profit, efficiency, and high financial leverage

Low ROE: indicates opposite of High