Ratios—Profitability & Equity

Question 1

Profitability Ratios

• 1. what do the profitability ratios measure?
• 2. Profit Margin
     * 1. equation?
     * 2. measure?
• 3. Return on Total Assets
     * 1. equation?
     * 2. measure?
• 4. Return on Common Stockholders’ Equity
     * 1. equation?
     * 2. measure?
• 5. Return on Owners’ (all Stockholders’) Equity
     * 1. equation?
     * 2. measure?
• 6. Earnings Per Share (for Common Stk)
     * 1. equation?
     * 2. measure?
• 7. Price-Earnings Ratio (P/E Ratio)
     * 1. equation?
     * 2. measure?
• 8. Common Stock Dividends Pay Out Ratio
     * 1. equation?
     * 2. measure?
• 9. Common Stock Yield
     * 1. equation?
     * 2. measure?

Answer 1

Profitability Ratios

• 1. measure a firm’s operating results (income/loss) on a relative basis.
• 2. Profit Margin
     * 1. = NI / Net Sales.
     * 2. measures the net profitability on sales (revenue).
• 3. Return on Total Assets
     * 1. = (NI + after-tax Interest Expense) / Average Total Assets.
     * 2. measures the efficiency with which invested resources (assets) are used.
• 4. Return on Common Stockholders’ Equity
     * 1. = (NI - Preferred Dividend (obligation for the period only)) / Average Common Stockholders’ Equity.
     * 2. measures earnings on common stockholders’ investment.
• 5. Return on Owners’ (all Stockholders’) Equity
     * 1. = Net Income / Average Stockholders’ Equity.
     * 2. measures earnings on all stockholders’ investment.
• 6. EPS (for Common Stk)
     * 1. = (NI - Preferred Dividends (obligation for the period only)) / Weighted Average Number of Shares Outstanding.
     * 2. measures the income earned per (average) share of common stock. Indicates ability to pay dividends to common shareholders.
• 7. P/E Ratio
     * 1. = Market Price per Common Share / EPS.
     * 2. measures how the market values the stock (how much investors are willing to pay for each dollar of reported profits), especially when compared with other stocks. If P/E is $13.40 it means investors are willing to pay $13.40 for every dollar of earnings.
• 8. Common Stock Dividends Pay Out Ratio
     * 1. = Cash Dividends to Common Shareholders / NI to Common Shareholder.
     * 2. measures the extent (percent) of earnings distributed to common shareholders.
• 9. Common Stock Yield
     * 1. = Dividend per Common Share / Market Price per Common Share.
     * 2. measures the rate of return (yield) per share of common stock.

Question 2

Equity/Investment Leverage Ratios

• 1. what do the equity/investment leverage ratios measure?
• 2. Debt to Equity Ratio
     * 1. equation?
     * 2. measure?
• 3. Owners’ Equity Ratio
     * 1. equation?
     * 2. measure?
• 4. Debt Ratio
     * 1. equation?
     * 2. measure?
• 5. Book Value per Common Stock
     * 1. equation?
     * 2. measure?
• 6. Book Value per Preferred Share
     * 1. equation?
     * 2. measure?

Answer 2

Equity/Investment Leverage Ratios

• 1. measure relative sources of equity and equity value.
• 2. Debt to Equity Ratio
     * 1. = Total Liabilities / Total Shareholders’ Equity.
     * 2. measures relative amounts of assets provided by creditors and shareholders.
• 3. Owners’ Equity Ratio
     * 1. = Shareholders’ Equity / Total Assets.
     * 2. measures the proportion of assets provided by shareholders.
• 4. Debt Ratio
     * 1. = Total Liabilities / Total Assets.
     * 2. measures the proportion of assets provided by creditors. Indicates the extent of leverage in funding the entity.
• 5. Book Value per Common Stock
     * 1. = Common Shareholders’ Equity / Number of Outstanding Common Shares.
     * 2. measures the per share amount of common shareholders’ claim to assets.
• 6. Book Value per Preferred Share
     * 1. = Preferred Shareholders’ Equity (including dividends in arrears) / Number of Outstanding Preferred Shares.
     * 2. measures the per share amount of preferred shareholders’ claim to assets.

Question 3

CPAexcel Flashcards

• 1. List the total common stock dividend payout rate formula.
• 2. What do equity/investment leverage ratios measure?
• 3. List the debt ratio formula.
• 4. List the price to earnings ratio formula.
• 5. List the common stock yield formula.
• 6. List the return on common stockholders’ equity formula.
• 7. What do profitability ratios measure?
• 8. List the return on total assets formula.
• 9. List the owner’s equity ratio formula.
• 10. List the debt to equity ratio formula.
• 11. List the return on owner’s equity formula.
• 12. List the book value per preferred share ratio formula.
• 13. List the profit margin formula.
• 14. List the per share common stock dividend pay out rate formula.
• 15. List the book value per common stock ratio formula.

Answer 3

CPAexcel Flashcards

• 1. Cash Dividends to Common Shareholders / NI to Common Shareholders.
• 2. Measure relative sources of equity and equity value.
• 3. Total Liabilities / Total Assets.
• 4. Market Price for a Common Share / EPS.
• 5. Dividend per Common Share / Market Price per Common Share.
• 6. (NI - Current Period Preferred Dividend Obligation) / Average Common Stockholders’ Equity.
• 7. Aspects of a firm’s operating (income/loss) results on a relative basis.
• 8. = (NI + after-tax Interest Expense) / Average Total Assets.
• 9. = Shareholders’ Equity / Total Assets.
• 10. = Total Liabilities / Total Shareholders’ Equity.
• 11. = NI / Average Stockholders’ Equity.
• 12. = Preferred Shareholders’ Equity (including dividends in arrears) / Number of Outstanding Preferred Shares.
• 13. = NI / Net Sales.
• 14. = Cash Dividends per Common Share / NI to Common Shareholders.
• 15. = Common Shareholders’ Equity / Number of Outstanding Common Shares.