profitability ratios analysis Flashcards
Profit margin % formula
profit margin / revenue x100
ROCE 1 formula
PBIT (opp profit) / capital employed (total assets - current liabilities)
ROCE 2 formula
PBIT (opp profit) / (equity + NC debt + current debt)
ROE formula
profit after tax - preference dividends / equity invested in company
profit margin formulas
net profit / revenue
gross profit / revenue
PBIT (opp profit) / revenue
x100
asset turnover formula
revenue / capital employed (total assets-current liabilities)
Profit margin definition
measures the amount of profit made for every pound of revenue generated
gross profit margin analysis
- if revenue has increased but profit margin has decreased- most likely driven by their increased cost of sales
profit margin analysis
- if profit margin has gone down, it could be due to increased expenses
- the higher the number the more better - means that costs are low and they are profitable
ROE definition
provides investors with insight into how efficiently a company is handling the money that shareholders have contributed to it.
ROCE definition
illustrates whether a company is generating profit from its capital or investments
ROCE interpretation
- ## a higher ROCE indicates a stronger profitability across company comparisons
ROE interpretation
- a higher ROE indicates that a company is better at converting its equity financing into profits
- a lower ROE indicates that a company is not using its shareholder’s equity efficiently to generate profit.
- Usually a ROE of 15%-20% is considered good.
Asset turnover definition
highlights how efficiently a company generates revenue from its assets(e.g. land, furniture, inventories and buildings)
asset turnover interpretation
- a high asset turnover ratio means a company is performing efficiently, as the ratio means they are generating more revenue per pound of assets.
- a low asset turnover indicates that a company is not using its resources productively and may be experiencing internal struggles
