Question

PROFITABILITY RATIO

a) Please describe in detail what PROFITABILITY RATIO attempt to measure?

b) Where would you obtain such information?

c) For what period of time and what other comparisons would assist your analysis.

d) What management policies would have a positive affect on this analysis tool.

Answer 1

A . Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a previous period indicates that the company is doing well.

B . There are two types of ratios .

A. Margin ratios

Margin ratios represent the company’s ability to convert sales into profits at various degrees of measurement.

Examples are: gross profit margin, operating profit margin, net profit margin, cash flow margin, EBIT, EBITDA, EBITDAR, NOPAT, operating expense ratio, and overhead ratio.

B. Return ratios

Return ratios represent the company’s ability to generate returns to its shareholders.

Examples include return on assets, return on equity, cash return on assets, return on debt, return on retained earnings, return on revenue, risk-adjusted return, return on invested capital, and return on capital employed.

C . The ratios are compared with past year data . This will help the firm know its position and growth .

D. Ratio analysis is used by three main groups: (1) managers who employ ratios to help analyze, control, and thus improve the firm`s operations; (2) credit analysts, such as bank loan officers or credit managers, who analyze ratios to help ascertain a company`s ability to pay its debts; and (3) stock analysts, who are intrested in a company` efficiency and growth prospects.