What do the performance ratio means

Question 1

What is gross profit margin

Answer 1

• Indicates the proportion of sales that a company retains after covering costs directly related to sales;
• Provides information on pricing strategy and cost of sales control;

If the gross margin increases from year to year, it could indicate :

• better inventory control;
• reduced procurement costs;
• reduction in the cost of purchasing/manufacturing goods;
• increase in selling price, etc.

Question 2

What is return on assets

Answer 2

Indicates the company’s ability to generate results (or profits) from all its assets.

Question 3

What is return on equity

Answer 3

Indicates the return shareholders on their invested capital.

Question 4

What are the operating margin and what do they mean

Answer 4

EBIT

EBITDA

Provides information on the % of operational profitability taking into account operating costs only.

Question 5

What is the net profit margin

Answer 5

• Indicates the proportion of sales that turn into profit (management’s ability to make operations profitable);
• What each $ of sales generates in NI;

Question 6

What is EPS and dialuted EPS

Answer 6

Allows the user of the financial statements to assess the impact of the company’s results on each outstanding share (interesting for existing shareholders);

• It measures the portion of net income earned by each common share;
• Cannot be compared to the industry since the number of shares outstanding differs from one company to another;

Question 7

What is price to earnings ratio

Answer 7

This ratio makes it possible to measure the performance of a company by the stock market valuation of its shares.