Common-Size Income Statements Gross Profit Method Operational Profit Margin Net Profit Margin Earnings Per Share Return on Total Assets Retur on Equity

1. Profitability Ratios

2. Profitability Ratios
 These measures enable analysts to evaluate the firm’s
profits with respect to a given level of sales, a certain
level of assets, or the owners’ investment.

3.  Common-size income statements
 A useful tool for evaluating profitability in relation to
sales .
 An income statement in which each item is expressed
as a percentage of sales.

4. Three Profitability ratios found on
common-size income statement
1. Gross Profit Margin
2. Operational Profit Margin
3. Net Profit Margin

5.  Gross Profit Margin
-This measures the percentage of each sales peso
remaining after the firm has paid for its goods.
Gross profit margin = Sales – Cost of good sold = Gross profits
Sales Sales

6. TABLE 3.7
Table 3.7 BARTLETT COMPANY COMMON-SIZE STATEMENT
For the year ended
December 31
2015 2014
Evaluation
2014-2015
Sales revenue
Less: Cost of goods sold
(1) Gross profit margin
Less: Operating expenses
Selling expense
General and Administrative expenses
Lease expense
Depreciation expense
Total operating expense
(2) Operating profit margin
Less: Interest expense
Net profits before taxes
Less: Taxes
Net profits after taxes
Less: Preferred stock dividends
(3)Net profit margin
100.0%
67.9
32.1%
3.3%
6.8
1.1
7.3
18.5%
13.6%
3.0
10.6%
3.1
7.5%
0.3
7.2%
100.0%
66.7
33.3%
4.2%
6.7
1.1
9.3
21.5%
11.8%
3.5
8.3%
2.5
5.8%
0.4
5.4%
Same
Worse
Worse
Better
Worse
Better
Better
Better
Better
Better
Better
Worse
Better
Better
Better

7.  Operating Profit Margin
This measures the percentage of each sales peso remaining after
all costs and expenses other than interest, taxes and preferred
stock dividends are deducted.
Operating profit margin =Operating Profits ÷ Sales

8. Net Profit Margin
This measures the percentage of each sales peso
remaining after all costs and expenses including
interest, taxes and preferred stock dividends have been
deducted.
Net profit margin= earnings available for common stockholders ÷ Sales

9. Other Profitability Ratios
1. EARNINGS PER SHARE
2. RETURN ON TOTAL ASSETS
3. RETURN ON EQUITY

10.  Earnings per share (EPS)
The Firm is generally of interest to present or
prospective stockholders and management.
Earnings per share = Earnings available for common stockholders
Number of share of common stock outstanding

11.  Return on total assets (ROA)
Often called the return on investment (ROI) measures
the overall effectiveness of management in generating
profits with its available assets.
ROA = Earnings available for common stockholders ÷ Total assets

12. Return on equity (ROE)
Measures the return earned or the common
stockholders’ investment in the Firm.
ROE = Earnings available for common stockholders ÷ Common stock equity

13. THANKYOU! 