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.