Profitability Measures Flashcards
Describe the “Common Stock dividend payout rate” measure.
Measures the extent (percent) of earning distributed to common shareholders; expressed as: C/S Dividend Payout Rate = C/S Cash Dividends/Net Income Available for Common Shareholders. Also, can be computed on a per share basis.
Describe profitability measures.
Ratios (and other measures) that measure aspects of a firm’s operating (profit/loss) results on a relative basis.
What does the “net profit margin on sales” measure? How is it expressed as a formula?
Measures who much (percentage) of each sales dollar that ends up as net income; exposed as: Profit Margin = Net Income/Net Sales.
What does the “price-earnings ratio” (“P/E ratio”); also called the “multiple”) measure? How is it expressed as a formula?
Measures the price of a share of common stock relative to its latest earnings per share; expressed as: P/E Ratio = Market price per common share/Earnings per common share.
Notice, it measures the number of times (“multiples”) earnings per share is reflected in the market price.
What does the “gross profit margin ratio” measure? How is it expressed a a formula?
Measures how much (percentage) of each sales dollar that is available to cover operating expenses and provide a profit; expressed as Gross Profit Margin = Gross Profit/Net Sales
What does the “ return on total assets” (also called the “return on investment”) measure? How is it expressed as a formula?
Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets or total equity) are used; expressed as: Net Income + Interest Expense + Income Taxes/Average Total Assets.
(NOTE: Some versions may not add back Interest Expense and/or Income Taxes.)
What does the “return on owners’ (all stockholders’) equity ratio” measure? How is it expressed as a formula?
Measures the rate of return (earnings) on all stockholders’ investment; expressed as: ROE = Net Income/Average Stockholders’ Equity.
What does the “residual income” measure? How is it expressed as a formula?
Measures the excess of an entity’s dollar amount of income over the dollar amount of its required return on average investment (based on its hurdle rate of return); expressed as: Residual Income = Net Income - (Average Invested Capital x Hurdle Rate).
What does the “economic value added (EVA)” measure? How is it expressed as a formula?
Measures an entity’s economic profit (not its accounting profit) as accounting earnings before deducting interest less the dollar value of opportunity cost associated with long-term debt and shareholders’ equity; expressed as: EVA = Earnings before interest - [Opportunity cost rate x (L-T debt + SE)].
