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Profitability RatioProfitability Ratio Profit Margin One category measures profit in relation to sales and reflect the ability of the company’s management to control expenses and turn sales into profit. Gross profit margin and net profit margin are two ratios frequently used to measure profit against sales. Gross profit margin formula,
The gross profit margin is affected by the cost of goods sold (and the method for determining the cost), as well as the company’s mark-up on its cost of goods sold. Net profit margin formula,
Net profit, or net income, is a firm’s income after all expenses, including interest and taxes, have been paid. The net profit margin is a measure of net profit against net sales. Increasing profit over a period generally means improvement in operating efficiently. It should be noted that the net profit to sales margin varies widely from industry to industry. When compared to the average, a company’s profit margin indicates whether the company is operating above or below the average efficiency of other companies in the same industry. A second category of profitability ratios measures profitability in relation to the invested fund used to generate these profits. This profitability ratio is often considered the most revealing measures of the overall effectiveness of the firm’s management. The operating income rate of return measures the rate of return on total investment before interest and taxes. The total tangible assets figure is used to measure the firm’s total investment. The formula is,
The total tangible assets of a firm are equal to total assets when there are no intangible assets such as goodwill included in the firm’s assets. If there are intangible assets, the figures for these should be subtracted from the total assets figure to obtain the total tangible assets figure. Besides, the return on total assets ratio also referred to as return on investment (ROI), measures the rate of return on investment after interest and taxes. The formula of ROI calculation is,
However, shareholders would also be interested in net income with respect to the value of shareholders’ equity, which can be calculated from return on equity (ROE) formula. Highly Recommended FREE Sign UpWatch My Favourite Online Stock Trading TV Show from Trading ExpertsTrend Analysis for Profitable Trading in Any Market, Anytime & Anywhere Inside Market News for Effective Insider's Trading Try to Compete with Me in This Funtastic Stock Trading Game ;) You'll be successful stock investor if you sign them all... After all, it's FREE!!! Sign Up to Easy Stock Tips Newsletter Related ReadingGood Stock Pick: Unlimited Investment Profits Framework How to Calculate Intrinsic Value for Stock Warren Buffet Way
Return on Equity (ROE), Debt to Equity Ratio (D/E), Efficiency Ratio, Liquidity Ratio, Leverage Ratio,
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