2) Profitability Indicator Ratios
2.1) Profit Margin Analysis
2.1.1) In the income statement, there are four levels of profit or profit margins - gross profit, operating profit, pretax profit and net profit.
2.1.2) The term "margin" can apply to the absolute number for a given profit level and/or the number as a percentage of net sales/revenues.
2.1.3) Profit margin analysis uses the percentage calculation to provide a comprehensive measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks.
2.1.4) Basically, it is the amount of profit (at the gross, operating, pretax or net income level) generated by the company as a percent of the sales generated.
2.1.5) The objective is to detect consistency or positive / negative trends in a company's earnings.
2.1.6) Positive profit margin analysis translates into positive investment quality. To a large degree, it is the quality, and growth, of a company's earnings that drive its stock price.
| Gross Profit Margin = | Gross Profit |
| Net Sales (Revenue) |
| Operating Profit Margin = | Operating Profit |
| Net Sales (Revenue) |
| Pretax Profit Margin = | Pretax Profit |
| Net Sales (Revenue) |
| Net Profit Margin = | Net Income |
| Net Sales (Revenue) |
2.2) Effective Tax Rate
2.2.1) is a measurement of a company's tax rate, which is calculated by comparing its income tax expense to its pretax income.
2.2.2) This amount will often differ from the company's stated jurisdictional rate due to many accounting factors, including foreign exchange provisions.
2.2.3) This effective tax rate gives a good understanding of the tax rate the company faces.
| Effective Tax Rate (%) = | Income Tax Expense |
| Pretax Income |
2.3) Return on Assets (ROA)
2.3.1) indicates how profitable a company is relative to its total assets.
2.3.2) illustrates how well management is employing the company's total assets to make a profit.
2.3.3) The higher the return, the more efficient management is in utilizing its asset base.
| Return On Assets (%) = | Net Income |
| Average Total Assets |
2.4) Return on Equity (ROE)
2.4.1) indicates how profitable a company is by comparing its net income to its average shareholders' equity.
2.4.2) measures how much the shareholders earned for their investment in the company.
2.4.3) The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors.
| Return On Equity (ROE) = | Net Income |
| Average Shareholders' Equity |
2.5) Return on Capital Employed (ROCE)
2.5.1) complements the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total "capital employed".
2.5.2) This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base.
2.5.3) By comparing net income to the sum of a company's debt and equity capital, investors can get a clear picture of how the use of leverage impacts a company's profitability.
2.5.4) Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management's ability to generate earnings from a company's total pool of capital.
| Return On Capital Employed (ROCE) = | EBIT |
| Capital Employed |
Capital Employed = Average Debt Liabilities + Average Shareholders' Equity
EBIT = Earnings Before Interest and Taxes
Source: http://www.fncalculator.com/financialcalculator?type=financialRatios#
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