Profitability Ratios
Investors
should pay attention to the company earnings and compare
the profitability ratios with other companies in the
same market sector over several years to spot for the
trend. It will help
you to make a wiser investment decision.
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Basic Earning Power (BEP)
Ratio |
Basic Earning Power (BEP)
Ratio = Earnings Before Interest and Taxes (EBIT) /
Total Assets or Average Assets
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Gross Profit |
Gross profit is profit available to cover other
expenses beyond cost of goods sold.
Gross profit = Net Sales - cost of goods
sold
Net Sales are the revenue minus an
allowance for rebates and returns.
Cost of Goods Sold such as raw material require to
produce the finish goods, money spent on manufacturing
the product and employee wages which the company spent to make the
product and service it sold.
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Gross Profit Margin (%) |
Gross profit
margin is margin
available to cover other expenses beyond cost of goods
sold.
Gross profit margin = (Net Sales -
cost of goods
sold) / Net Sales
Net Sales = Total Revenue - (allowance for returns, rebates, etc.)
Cost of Goods Sold
= cost to produce the products that including the cost
of material and direct labor cost etc...
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Operating Expenses |
General Operating Expenses
are expenses require to running the day-to-day operation.
such as research and development, rental, salaries, sales
and marketing expenses costs.
Depreciation = amount of value an equipment
or tangible assets loss in value over its useful life
use by accountants to allocate the assets cost across
the assets useful life.
Straight-line depreciation
schedule, company deduct asset value by fix amount each year
on financial statements until the assets has been fully
depreciated.
Accelerated
Depreciation Methods: Two common methods of
accelerated depreciation are
Double Declining Balance and Sum-of-the-Years'-Digits.
Accelerated depreciation methods put more weight on the
current years deduction compare to the straight-line
method.
Operating
expenses =
General
Operating Expenses -
Depreciation Expense
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Operating Income |
Operating Income, known as profit from
operations, is the income before interest and taxes.
Operating Income is business model base.
Operating income =
Gross profit -
Operating
Expenses
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Operation Efficient |
Operation Efficient
=
Total
Operating Income /
Total Revenue
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Operating Margin |
Operating margin is margin available to cover interest
costs, taxes and dividends. Operating margin
=
Operating Income /
Net Sales
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Profit Margin |
Profit margin also known as Return on Sales, it shows
how much before tax profit is generated for each dollar
of sales. Profit margin =
Income before
taxes /
Net Sales
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Net Income |
Net income also known as Net Earnings or Net
Profit. Net income =
EBIT -
Interest
Expense -
Income Taxes
Interest Expense = interest paid to company debtors.
Income tax = Federal taxes or state taxes base on
company net profit.
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Net Profit Margin |
Net profit margin shows how much after tax profit (net
income) are generated by each dollar of sales.
Net profit margin =
Net Income /
Net Sales
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Profitability Ratios