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Questions and Answers
What does the Profit Margin ratio measure?
What does the Profit Margin ratio measure?
The profit margin ratio measures the net income generated by each currency unit of sales.
What is the formula for calculating the Asset Turnover ratio?
What is the formula for calculating the Asset Turnover ratio?
Net Sales / Average Total Assets
What does the Return on Assets ratio measure?
What does the Return on Assets ratio measure?
The return on assets ratio measures the overall profitability of assets.
What does the Return on Ordinary Shareholders' Equity ratio measure?
What does the Return on Ordinary Shareholders' Equity ratio measure?
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What does the Earnings Per Share (EPS) ratio measure?
What does the Earnings Per Share (EPS) ratio measure?
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What does the Price-Earnings (P/E) ratio measure?
What does the Price-Earnings (P/E) ratio measure?
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What does the Payout Ratio measure?
What does the Payout Ratio measure?
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Study Notes
Profitability Ratios
- Profit margin: Net income / Net sales. Measures net income generated per currency unit of sales.
- Asset turnover: Net sales / Average total assets. Measures how efficiently assets are used to generate sales.
- Return on assets: Net income / Average total assets. Measures overall profitability of assets.
- Return on ordinary shareholders' equity: (Net income - Preference dividends) / Average ordinary shareholders’ equity. Measures profitability of owners' investment.
- Earnings per share (EPS): (Net income - Preference dividends) / Weighted-average ordinary shares outstanding. Measures net income earned on each ordinary share.
- Price-earnings (P-E) ratio: Market price per share / Earnings per share. Measures the ratio of the market price per share to earnings per share.
- Payout ratio: Cash dividends declared on ordinary shares / Net income. Measures percentage of earnings distributed in the form of cash dividends.
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Description
Test your knowledge on key profitability ratios used in finance. This quiz covers important metrics such as profit margin, asset turnover, return on assets, and earnings per share. Perfect for students and professionals looking to solidify their understanding of financial performance indicators.
