Learning Goals : By Completing This lecture, you should be able to know



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profitability and market
Lecture 2 Risk And Return - part 1 october 15 (3), lec 2
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 :
        • Net profit margin =
  • 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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