The document discusses profitability ratios which help analysts assess a firm's profits in relation to sales, assets, or investment. It highlights key ratios from common-size income statements: gross profit margin, operating profit margin, and net profit margin, along with other metrics like earnings per share, return on total assets, and return on equity. Formulas for each ratio are provided, emphasizing their importance for understanding financial performance.

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

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