Profitability Ratios
Profit Margin
Gross Margin: How much a company can mark up sales above COGS.
Operating Margin – Percentages of sales left after covering operating expenses.
Pretax Margin – Profitability after accounting for non-operating expenses.
Net Profit Margin – Company’s ability to generate earnings after taxes.
Formula: Any of the above (gross profit, operating profit, pretax profit, etc.) / Total Sales
Return on Assets
– How profitable a company is relative to its total assets?
– Return on Assets: Net Income / Total Assets
Return on Equity
– Also called return on net assets
– Return on Equity: Net Income / Average Shareholder’s equity
Earnings Per Share (EPS)
– A portion of company’s profit allocated to each share of common stock.
– EPS: (Net Income – Preferred Dividends) / Weighted Average Common Shares
Valuation Ratios
Price to earnings ratio
– Indicating how many years of earnings will it take a company to earn back its stock price.
– Price to earnings ratio: Market Price per Common Share / Earnings per Share
– Other Valuation Ratios: Price to Sales, Price to cash flow, and price / earnings growth
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