Profitability Ratios:
- Before going in depth with profitability ratios , We must to have a look on Income Statement :
Sales ( revenues )
(-) Cost of Good Sold ( COGS )
= Gross Profit
(-) expenses( operating , General and administrative , lease, and Depreciation )
= Operating Profit ( Earning before interest and Tax ) EBIT
(-) Interest expenses
= Net profit before Tax
(-) Tax expenses
= Net profit After Tax
(-) Dividends for preferred Stocks
= Net Profit ( Available to Common Stockholders )
Profitability Ratios:
- Profitability ratios measure the overall performance of the firm relative to revenues, assets, equity, and capital.
- Operating profitability ratios look at how good management is at turning their efforts into profits.
The Net profit margin is the ratio of net income to revenue :
- Analysts should be concerned if this ratio is too low.
- The net profit margin Measures net income generated by each dollar of sales
Profitability Ratios:
Assume that :
( Profit ) earning available to Common Stockholders (year 2020 ) =$ 221,000 , Sales = $3,074,000 .
Net profit margin =
= $221,000 ÷ $3,074,000 = 7,2 %
Net profit Margin ( 2019 ) was equal to 5,4 % So , Net profit margin in 2020 better than 2019
The More The Better
- The Gross Profit Margin is the ratio of gross profit (sales less cost of goods sold) to sales:
2) Gross Profit Margin =
- An analyst should be concerned if this ratio is too low.
- Gross profit can be increased by raising prices or reducing costs. However, the ability to raise prices may be limited by competition.
- Assume that :
( Profit ) earning available to Common Stockholders (year 2020 ) = $221,000 Sales = $3,074,000 , COGS= $ 2,088, 000 .
So :
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