Profitability Ratios
Gross Profit Margin (GPM)
GPM = Gross Profit / Net Sales
- % gross revenue that remains after paying for merchandise
- key analysis is whether the GPM is keeping up w/ increase or decrease of sales
Profitability Ratios
Operating Profit Margin (OPM)
OPM = Operating Income / Net Sales
- % of gross revenue after General and Admin expenses are paid
Profitability Ratios
Net Profit Margin (NPM)
NPM = Net Income / Net Sales
- % of gross revenue after other gains and loses
- AKA “Profit margin on sales”
- If net sales ↑, and other factors stay the same, NPM worsens ↓ because more sales are generating the same bottom line
Profitability Ratios
EBITDA Margin %
(Earnings Before Interest, Taxes, Depreciation, Amortization)
EBIDTA = EBITDA / Net sales
- approximates cash-basis profits from ongoing operations
- only used for companies that look bad under other ratios.
- shows how a company is performing if fixed costs are ignored
Profitability Ratios
Return on Assets (ROA)
ROA = Net Income / Avg Total Assets
- measures how well management is deploying assets in pursuit of profit
Profitability Ratios
Return on Equity (ROE)
ROE = Net Income / Avg Total Equity
- measures the return per owner dollar invested
- ROE will always be greater than ROA
4 Ways to adjust the Numerator on Return Ratios
- Subtracting preferred dividends to leave only common shares outstanding
- Add back minority interest in the income of a consolidated subsidiary
- Add back interest expense
- Add back both interest expense & taxes so numerator is = EBIT
- Results in basic earning power ratio
5 ways to adjust Denominator on Return Ratios
- Excluding on operating assets, such as investments, intangible assets, and the other as a category
- Excluding unproductive assets such as auto plant intangible assets, and obsolete inventory
- Excluding current liabilities to emphasize long-term capital
- Excluding Deb and preferred stock to arrive at equity capital
- Stating invested capital at market value
Profitability Ratios
DuPont Model for ROA
NI = NI x N.Sales
Avg TA N. Sales Avg TA
- 2 component ratios; 1 Income Statement related, 1 Balance Sheet related
- Interrelated since both involve Net Sales
Profitability Ratios
DuPont ROE
ROE = (NI / N. Sales) x (N. Sales / Avg. TA) x (Avg TA / Avg TEq)
ROE = NPM x Asset TrnOvr x Eq. Mult.
- NPM: measures efficiency in generating earnings from sales. Amt of earnings made from every $1 sales
- Asset TrnOver: measures efficienty of deploying total resources to generate revenues
- Eq Mult: measures company financial leverage
Book Value per Share (BVpS)
BVpS = T.Eq - Liq. Val. Pref.Eq / C.Shares
= (Total Equity - Liquidation Value of Pref. Equity) / Common Shares Outstanding
- Amount of net assets attributable to common shareholders per share outstanding
- Book value based on historical cost expressed in nominal $’s
- Can be misleading because BV’s ordinarily differ from Fair Market Values
- Fair Market Value is what a share sells for in the open market
Market/Book Ratio
M/B R. = MPpS / BVpS
= Market Price per Share / Book Value per Share
- measures how much an investor must spend to “own” a dollar of net assets
- High M/B R. reflects stock market’s possitive assessment of the firm’s assets
Price/Earnings Ratio (PE)
PE = MPpS / EPS
= Market Price per Share / EPS
- measures how much an investor must spend to “own” a dollar of earnings
- High M/B R. reflects stock market’s possitive assessment of the firm’s assets
Price/EBITDA Ratio
= Market Price PerShare / EBITDA Per Share
BEPS
Income Avail to Common Shares (IACS) / Weighted Avg # of Common Shares Outstanding
Diluted EPS
Income Avail to Common Shares (IACS) + Paid amount to Potential Stock Conv. / Wt. Avg # of Common Shares Outstanding + Wt. Avg of Diluted Pot’l Stock conv.
Earning Yield
EPS / Market Price PerShare
Divedent Payout Ratio
Div to Comm Stakeholders / IACS
Dividend Yield
DPS / Mkt Price Per Share
