Evaluating Profitability Flashcards
Profitability
The ability of the business to earn profit, as compared against a base, such as sales, assets or owner’s equity.
Liquidity
The ability of the business to meet its short-term debts as they fall due.
Efficiency
The ability of the business to manage its assets and liabilities
Stability
The ability of the business to meet its debts and continue its operations in the long term.
Return on Owner’s Investment (ROI) definition
How effectively a business has used the owner’s capital to earn profit.
Return on Owner’s Investment (ROI) formula
Net Profit/Average Capital X 100
Debt Ratio definition
Measures the percentage of a firm’s assets that are financed by liabilities
Debt ratio formula
Total Liabilities/Total Assets X 100
Return on Assets definition
Measures how effectively a business has used its assets to earn profit
Return on Assets formula
Net Profit/Average Total Assets X 100
Asset Turnover definition
Measures how productively a business has used its assets to earn revenue
Asset Turnover formula
Sales/Average Total Assets
Controlling Expenses
The firm’s ability to manage its expenses so that they either decrease or, in the case of variable expenses, increase no faster than sales revenue
Net Profit Margin definition
Calculates the percentage of sales revenue that is retained as Net Profit
Net Profit Margin formula
Net Profit/Sales Revenue X 100
