Profitability
- Provides the owners perspective
- Is the firm yielding advantageous returns or results?
- How profitable is a company in relation to the assets and the sales that made its profits possible?
- Those interested in mergers and acquisitions consider this key for selecting candidates
Return on sales (ROS) = (Net Incomes/Annual Net Sales) x 100
-This ratio indicates the level of profit from each dollar of sales, and therefore measures the efficiency of the operation.
-This ratio can be used as a predictor of the company’s ability to withstand changes in prices or market conditions.
Return on Assets (%) (ROA) = Net Income/Total Assets x 100
-A critical indicator of profitability
-Companies which use their assets efficiently will tend to show a ratio higher than the industry norm
Return on Net Worth (Return on Equity) (%) = Net Income/Net Worth x 100
-This is the ‘final measure’ of profitability to evaluate overall return.
-This ratio measures return relative to investment in the company.
-Return on Net Worth indicates how well a company leverages the investment in it.
-A relationship of at least 10% is regarded as a desirable objective for providing dividends plus funds for future growth.
Financial Freedom 101 