MAFundamentals defines the foundation of Management Accounting from cost concept, classification and analysis. It provides general discussion on COST, VOLUME, PROFIT, VARIANCE and other information necessary for performance measurement, decision making and pricing.

Profitability Ratios

Firms or companies' Profitability Ratios measure earnings in relation to some base such as capital, sales or assets.

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There are nine (9) types of ratios covered.
  1. Profit Margin on Sales (or Net Profit Percentage)
    FORMULA SIGNIFICANCE
    Net Income
    Net Sales     		Measures the percentage of net income to sales

  2. Net Operating Income to Sales
    EBIT*
    Net Sales

    *Income before Interest and Taxes    		Measures the percentage of operating income to sales

  3. Return on Investment (or Return on Total Assets or Return on Invested Capital)
    Net Income
    Average Total Assets    		Indicates whether management is using funds wisely.

  4. Net Operating Income to Total Capital
    EBIT
    Equity + Interest-bearing Debt    		A variation of the Return on Total Assets that excludes non-interest bearing debt from total assets

  5. Marginal Profitability Rate
    Change in EBIT
    Change in Capital    		A variation of the Net Operating Income to Total Capital Ratio

  6. Return on Common Equity
    Net Income - Preferred Dividends
    Average Common Equity    		Measures the return on the carrying amount of equity.

  7. Marginal Return on Common Equity
    Change in Net Income
    Change In Common Equity    		A variation of the return on common equity

  8. Return on Total Equity
    Net Income - Dividends on Redeemable Preferred Stock
    Average Total Equity

  9. Economic Value Added (EVA)
    Net Operating Profit ater Taxes less Capital Charge* or
    Total Cost of Capital

    *Capital Change = total capital employed x Weighted Average Cost of Capital     		A measure of the shareholder value creatio.