Profitability Flashcards
Profitability ratios are
Efficiency ratios
Show the financial health and performance
The higher the ratio, the more efficient assets are being used to generate earnings
Important to investors
Operating margin formula
EBIT/Sales*100%
Operating profit/Net revenue*100%
Net profit margin
Net income/net sales *100%
EAT/sales*100%
Net profit/net revenue*100%
ROTA tells us
How much money is earned for each $ invested in assets
About operating efficiency
Relation between resources and income
= BEFORE tax
ROTA formula
EBIT/TA*100%
Operating profit/TA *100%
ROE tells us
Ability to return on equity investments
The higher the ratio, the more efficient money and growth is earned from its equity financing
= AFTER TAX
ROE formula
EAT/OF*100%
Net profit/total equity*100%
Asset turnover ratio tells us
= Sales to TA
Efficiency of a company’s assets in generating revenue or sales
Asset turnover ratio formula
Sales to TA formula
net sales/average TA
revenue/average TA
An extremely high ROE
Can indicate risk if equity is small compared to income or can be because of excessive debts
Cons of ROTA
Uses book value instead of market value –> overestimation on the return
Looks good, even though debt was used to buy assets and a company is struggling to pay its interest expenses
EBITDA margin
Measures profitability from operations
Pros using EBITDA margin
Sole focus on the essentials: operating profitability and cash flows
Can compare companies of different sizes in the same industry
Cons using EBITDA margin
Draws attention away from high debts, do not use for companies with high debts
Usually higher than profit margin, so companies will show EBITDA instead of profit
Non-GAAP
EBITDA margin formula
EBITDA / revenue
