Week 3 Profitability ratio and Dupont Analysis Flashcards
(26 cards)
what does turnover measure
Efficiency, higher ratio means greater profitability.
It shows us a companies competitive position and management quality
what are the 4 types of Return on sales ratio and profit margin ratios
Gross Profit Margin
Operating profit Margin
Pretax Margin
Net profit Margin
what is the formula of gross profit Margin
Gross Profit / Revenue
what is Operating Profit Margin
Operating profit/ Revenue
What Pretax Margin
Earning before tax (EBT) / Revenue
what is Net Profit Margin
Net profit/ Revenue
In which of the common-size statements below can most ROS ratios be
found?
Common Size Income Statements
what does a high High gross margin mean
means strong control over production or purchase costs
what does operating profit margin show us
“For every £1 of revenue, the company earns £X from its operations before interest and taxes.”
what does net rpfit margin tell us
For every £1 of revenue, the company keeps £X in profit after all costs are paid.
When OP margin growing more slowly than GP margin,
it usually signals a rise in operating (indirect) expenses relative to sales.
what does it mean when If Pretax Margin Is Growing Faster Than OP Margin and is it sustainable
It typically means the company’s profits from non-operating activities are increasing — more than from its core operations.
Possibly Unsustainable:
If growth comes from one-off gains like selling assets, investment windfalls, or temporary tax advantages, then:
📉 Pretax margin growth is not sustainable.
In this case, future profitability may decline once those sources dry up.
🔸 Potentially Sustainable:
If non-operating income is recurring and tied to a strategic shift (e.g., growing financial services, real estate income, or passive income streams), then:
✅ It may be sustainable, especially if the firm is deliberately diversifying.
what does it signal when Net Profit Margin (NP Margin) is growing faster than the Pretax Profit Margin
it typically signals improved tax efficiency
what is Dupont analysis and its purpose
is a DECOMPOSITION OF ROE)
- evaluate how different aspects of company performance
affect profitability as measured by ROE
e.g., determine the reasons for
changes in ROE over time for a given company
differences in ROE across companies in a given time
what are return on investment ratios
Ratios that looks at a firms return on investment
what are the return on investment examples
- Return on Assets
- Operating Return on Assets
- Return on Equity
what is the formula for return on assets and what does it tell us
Return on assets (ROA) = Net profit / Total assets
What is the formula for Operating return on Assets and whats its purpose
Operating ROA = Operating profit / Total assets
its purpose is to measure the efficiency in using assets to generate OP,
regardless of
financing sources
tax jurisdictions of operations
what is return on total capital or debt to equity formula and what is its purpose
Return on Total Capital = Operating profit / (Total debt + Total equity)
Total debt = LT debt + ST debt
its purpose is to measures ability to generate OP with capital employed
What is Return on Equity Formula
Return on equity (ROE) = Net profit / Total equity
Do Analysts make an Adjustment to return on assets formula and why
Yes they sometimes use
[Net profit + (1-t) x Net interest exp.] / Total assets
Analysts do this to remove the effects of debt financing and taxes. This gives a clearer view of how efficiently a company’s assets generate operating profits, making it easier to compare companies with different capital structures. Essentially, it isolates asset performance from financing decisions.
what is the formula of the dupont analysis
ROE = Net income/ Revenue (Net Profit Margin) * Revenue/ Assets (Asset Turnover) * Assets/ Equity (financial leverage)
what can the dupont analysis help us with
Developing a greater analysis of what needs to be improved by a firm
what is a 5 way dupont analyis
a return on equity into five detailed components, providing deeper insight into what drives a company’s performance.
