- Profitability ratios (51): How well the company generates operating profits/net profit from sales.
- Net profit margin (52): how much of each dollar in revenue collected by a company translates into profit
- Operating profitability ratios (53): How good management turning effort into profits
- Compare the top of income statement (Sales) to profits
- Gross profit = net sales – COGS
- Operating profit (EBIT) = gross profit – Operating expense
- Net income (EAT) = operating profit – taxes – interest
- Total income (= long-term debt + short-term debt + common and preferred equity
- Total capital = total asset
- Gross profit margin (54): Ratio of gross profits to sales
- Can be increased by raising prices or reducing costs
- Operating profit margin (55): the ratio of operating profit to sales
- EBIT include some non-operating items, such as gains on investment
- EBITDA: Earning before interest, taxes, depreciation and amortization
- Pretax margin (56)
- Earning before tax (EBT) = EBIT – Interest
- Return on assets (57):
- Interest adjusted for tax should be added back to net income to put the returns to both equity and debt holders
- Operating return on assets (58)
- Return on total capital (ROTC) (59)
- Return on equity (60)
- Return on common equity (61)
- Net profit margin (52): how much of each dollar in revenue collected by a company translates into profit
Calculate valuation ratios
- Valuation ratios (62):
- sales per share (63)
- earning per share (64)
- price to cash flow per share (65)
Notes
- Revenue and sales:
- Revenue: total income generated by the sale of goods or services, related to the company’s core operations. All revenue doesn’t necessarily derive from sales.
- Sales: the proceeds a company generates from selling goods or services to its customers.
- Lease payment
- A lease payment is the equivalent of the monthly rent, that is formally dictated under a contract between two parties.
- Net profit vs net income
- Profit simply means the revenue that remains after expenses
- Net income, also known as net profit, is a single number, representing a specific type of profit.
- While net income is synonymous with a specific figure, profit conversely can refer to a number of figures
- Total capital and total asset
- A company’s assets include all the things it owns, such as office furniture, buildings, machinery, vehicles, stationery and cash.
- Capital refers to the net worth of a company. To find a company’s capital, review
- its balance sheet and deduct its total liabilities from its total assets.