Question:
Show the calculation of the following profitability ratios: (1) the profit margin on sales, (2) the return on
assets, and (3) the return on shareholders’ equity. What information about a company do these ratios
offer?
Answer:
Profit margin on sales = Net income
Net sales
Return on assets = Net income
Average total assets
Return on shareholders' = Net income
equity Average shareholders' equity
A fundamental element of an analyst’s task is to develop an understanding of a firm’s profitability.
Profitability ratios provide information about a company’s ability to earn an adequate return relative to
sales or resources devoted to operations. Resources devoted to operations can be defined as total assets or
only those assets provided by owners, depending on the evaluation objective.
Show the calculation of the following profitability ratios: (1) the profit margin on sales, (2) the return on
assets, and (3) the return on shareholders’ equity. What information about a company do these ratios
offer?
Answer:
Profit margin on sales = Net income
Net sales
Return on assets = Net income
Average total assets
Return on shareholders' = Net income
equity Average shareholders' equity
A fundamental element of an analyst’s task is to develop an understanding of a firm’s profitability.
Profitability ratios provide information about a company’s ability to earn an adequate return relative to
sales or resources devoted to operations. Resources devoted to operations can be defined as total assets or
only those assets provided by owners, depending on the evaluation objective.
