Profitability Ratios

profitability_ratios

Net Profit Margin (Return on Sales):

A measure of net income dollars generated by each dollar of sales.

Formula:

Net Income *
Net Sales

* Refinements to the net income figure can make it more accurate than this ratio computation. They could include removal of equity earnings from investments, “other income” and “other expense” items as well as minority share of earnings and non-recurring items.

Return on Assets:

Measures the company’s ability to utilize its assets to create profits.

Formula:

Net Income *
(Beginning + Ending Total Assets) / 2

Operating Income Margin:

A measure of the operating income generated by each dollar of sales.

Formula:

Operating Income
Net Sales

Return on Investment:

Measures the income earned on the invested capital.

Formula:

Net Income *
Long-term Liabilities + Equity

Return on Equity:

Measures the income earned on the shareholder’s investment in the business.

Formula:

Net Income *
Equity

DuPont Return on Assets:

A combination of financial ratios in a series to evaluate investment return. The benefit of the method is that it provides an understanding of how the company generates its return.

Formula:

Net Income *     x     Sales     x       Assets
Sales                      Assets            Equity

Gross Profit Margin:

Indicates the relationship between net sales revenue and the cost of goods sold. This ratio should be compared with industry data as it may indicate insufficient volume and excessive purchasing or labor costs.

Formula:

Gross Profit
Net Sales

 

Post Author: Muraya Muya