7.9 Profitability ratios Flashcards Preview

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Flashcards in 7.9 Profitability ratios Deck (17)
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1
Q

What is the purpose of profitability ratios?

A

To measure the capability of the company to generate profit compared to expenses, sales, assets and shareholder equity.

2
Q

What is profitability a measure of?

A

The company’s effectiveness in capital and asset utilization.

3
Q

What are the two categories of profitability ratio?

A

Margin ratios

Return ratios

4
Q

What are margin ratios?

A

A measure of the company’s ability to convert sales into profits, e.g.:

  • gross profit margin ratio
  • operating margin ratio
  • net profit margin ratio
5
Q

What are return ratios?

A

A measure of the company’s ability to generate returns to its shareholders, e.g.:

  • return on assets ratio
  • return on capital employed (ROCE)
  • return on equity (ROE)
6
Q

What does gross profit margin ratio calculate?

A

The ratio of gross profit to sales (i.e. how much the company is earning given its costs to produce its goods/services)

7
Q

What is the formula for calculating gross profit margin ratio?

A

(gross profit / sales) x 100

8
Q

What does operating profit margin ratio calculate?

A

The ratio of operating margin to sales (i.e. the percentage of sales remaining after accounting for operating expenses).

9
Q

What is the formula for calculating profit margin ratio?

A

(Operating / sales) x 100

10
Q

What does net profit margin ratio calculate?

A

The company’s ability to earn profit after taxes.

11
Q

What is the formula for calculating net profit margin ratio?

A

(Net profit / sales) x 100

12
Q

What does return on assets ratio calculate?

A

How effectively assets are used in comparison to the income earned.

13
Q

What is the formula for calculating return on assets ratio?

A

Net income / total assets

14
Q

What does return on equity ratio calculate?

A

The company’s ability to provide returns to its equity holders.

15
Q

What is the formula for calculating return on equity ratio?

A

Net income / total equity.

16
Q

What does return on capital employed (ROCE) ratio calculate?

A

The return generated by all sources of capital, including equity and debt providers.

17
Q

What is the formula for calculating return on equity ratio?

A

[EBIT X (1 - tax rate)] / (total equity + debt)

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