Ch 5 Accounting Profitability Ratios.txt

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Author:
Giovanni
ID:
156990
Filename:
Ch 5 Accounting Profitability Ratios.txt
Updated:
2012-06-03 02:17:24
Tags:
earning power
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Description:
These ratios are designed to measure a firm’s earnings power.
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  1. Profitability Ratios
    • lThese ratios are designed to measure a firm’s
    • earnings power.

    • lNet income, the primary measure of the
    • overall success of a company, is compared to other measures of financial
    • activity or condition to assess performance as a percent of some level of
    • activity or investment.
  2. Return on Equity
    ROE = Net Income/ Average Shareholders’ Equity

    • This ratio measures the effectiveness at
    • managing capital provided by the shareholders.
  3. Return on Assets
    • Net Income + Interest Expense (1-tax rate) /
    • Average Total Assets

    • This ratio measures the effectiveness at
    • managing capital provided by all investors (stockholders and creditors).
  4. Return on Sales
    Return on Sales = Net Income + Interest Expense (1-tax rate) / Net Sales
  5. This ratio provides an indication of a company’s ability to
    • generate and market profitable products and control its costs; also called the
    • Profit Margin.

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