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Saturday, 7 January 2012

Financial ratio Analysis:Profitability Ratios

These Ratios gives a good understanding of how well the company utilized its resources in generating profit and share holders value.
Operating margin ratio(EBIT):Operating Margin is the proportion of revenue remaining after paying the costs of operating the business (wages,raw materials,administrative expenses, advertisement .etc)
Operating margin is also known as operating income margin,operating profit margin ,return on sales(ROS) and EBIT(Earning Before Interest and Taxes). This metric is very useful in Fundamental Analysis.This is a measure of overall operating efficiency.

Operating Margin= (Operating Income(Net Profit))/(Revenue(Net Sales))
Operating profit determines the quality of a company. The higher the operating margin, the better.
Gross Profit Margin: Gross profit is what remains from sales after a company pays out the cost of goods sold.
This metric can be used to compare a company with its competitions, more efficient companies will usually see higher profit margin.
COGS=Cost Of Goods Sold
Net Profit Margin:Net Profit Margin measures how much of each dollar earned by the company is translated into profits.
Net Profit Margin=Net Profit (after taxes)/Net Sales
Net profit margin is an indicator of how efficient a company is and how well it controls its costs.
Low profit margin indicates a low margin of safety. The higher the margin is, the more effectively the company is converting revenue into actual profit.
Cash Margins:Cash flow margin expresses the relationship between cash generated from operations and sales.
Cash Margin=cash flow from operating cash flows/net sales
The larger the percentage, the better.
Return On Assets:This measures the efficiency with which the company is managing its investment in assets and using them to generate profit.
ROA= Net Income/ Total Assets
The higher the percentage ,the better because the company is doing a good job using its assets to generate sales.
Return On Equity: It measures the return on the money the investors have put into the company.
ROE=Net Income/Stock holders Equity

1 comment:

chirag said...

nice blog
i didn't have much knowledge of share market
will learn from your blog
mere blog par bhi aaiyega
umeed kara hun aapko pasand aayega

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