Profitability Ratios

Return on Total Capital (ROTC)

(EBIT) / (Average Total Capital) Total capital includes short & long term debt, preferred equity, & common equity

EBIT Margin

(EBIT) / (revenue)

Interest Burden

(EBT) / (EBIT) INCREASING interest expense -> INCREASE ratio INCREASING interest expense -> DECREASE ROE

Pretax margin

(EBT) / (Revenue) EBT = sales - COGS - operating costs - interest

Gross Profit Margin

(Gross Profit) / (Revenue) Can be increased by raising prices, or reducing costs

Total Capital

(Long-term debt) + (Short-term debt) + (Common & Preferred Equity) Working capital liabilities (like accounts payable) are sometimes included

Return on Assets (ROA) Alternative: includes interest

(Net Income + Interest Expense(1-tax rate)) ÷ (Average total Assets)

Return on Common Equity

(Net Income - Preferred Dividends) / (Average Common Equity)

Return on Equity (ROE)

(Net Income) / (Average Total Equity)

Return on Assets (ROA)

(Net Income) / (Average total assets) [(Net Income) / (Sales)] ×[(Sales) / (Assets)] Misleading because assets include debt and equity, and net income excludes payments on debt (interest)

Tax Burden

(Net Income) / (EBT) This is equivalent to (1 - tax rate) INCREASING tax expense -> DECREASE ROE

Net Profit Margin

(Net Income) / (Revenue) LOW ratio -> BAD

Operating Return on Assets

(Operating Income) / (Average Total Assets)

Operating profit margin

(Operating Income) / (Revenue)

Operating profits

(Sales) - (COGS) - (Operating expenses) ALMOST the same as EBIT, but EBIT includes gains on investments

DuPont Equation

Breaks down ROE into three components allowing you to see what is driving changes in ROE ROE = (net profit margin) × (asset turnover) × (leverage ratio) OR... ROE = (tax burden) × (interest burden) × (EBIT margin) × (asset turnover) × (leverage ratio)

Net Income

Earnings after taxes and BEFORE dividends

Operating Profitability Ratios

Measure how well management is able to efforts into profits. Compares top of income statement (sales) with profits, with different ratios isolating different costs

Profitability ratios

Measures overall performance relative to revenues, assets, equity, and capital

Gross Profits

Net sales - COGS