Profitability ratio

Starting from the top of the income statement and working down, gross profit refers to the place within the income statement where COGS reduce revenues. Gross profit is an important number because if the company cannot earn enough from a product line to cover its direct costs, it will not be able to remain in business. Notice PepsiCo uses COS instead of COGS (Table 4.3). This, too, is a matter of preference. 

Operating profit is often referred to as earnings before interest and taxes (EBIT). It is the profit when revenue is reduced by COGS 

Gross profit - Operating ei enses (SG A) = Operating profit (EBIT) 

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Ratios well below 1 may indicate financial problems ahead while those substantially greater than 1 may point to poor credit control or under-utilization of cash. This ratio is sometimes known as the acid test . The principal profitability ratio in use is the net profit before interest and tax (NPBIT) to net assets or return on capital employed. 

Financial ratios are classified according to the information they provide. Table 15-6 provides a fist of selected financial ratios used in various pharmacy settings. Different ratios give different pictures of the company s performance and serve different analytical needs. Profitability ratios, liquidity ratios, and turnover ratios are described below. For further discussion of other financial report ratios please refer to Stickney (1999). 

Since an inherent goal of any business is to be profitable, we can view profitability ratios as measures of overall success in the daily operations of a business. More specifically, profitability ratios provide a method to measure the overall financial success of a company. Examining profitability ratios allows managers to assess the company s level of success in generating profits. The most commonly used profitability ratios are the gross profit margin and the net profit margin. 

Net profit margin indicates the fraction of net profit that is generated for every dollar of sales. As mentioned earlier, as a profitability ratio, it could be used to determine how well the organization manages its operating expenses. It could also be used to compare the performance of two or more pharmacies within a chain or to assess the performance of a pharmacy against industry averages. 

Net profit margin A profitability ratio that indicates the fraction of net profit generated for every dollar of sales. It is calculated by dividing net income after taxes by total sales. 

Return on assets A profitability ratio reflecting a company s ability to generate net income as a percentage of its total assets. 

Leverage ratios a measure of a company s overall debt burden Activity ratios a measure of how effectively a company manages its assets Profitability ratios an indication of a firm s total operating performance, which is a combination of asset and income management... 

Activity ratios are used to determine the company s management of assets, while profitability ratios help to evaluate its income management. 

Using data from the 1994 annual report of Monsanto, calculate the CPI company s liquidity, leverage, activity, and profitability ratios. What was the Z score ... 

The annual financial reports of public companies contain estimates of total firm profit rates based on accounting records. For example, the net income as a percent of the total book value of assets27 is a commonly used benchmark of firm profitability (301). Companies themselves report this ratio in their annual financial statements and compare their performance in specific years with that in previous years. Other commonly used profit ratios, such as net income as a percent of sales, are also easily computed from company financial statements. 

Evidence on the economic rate of return to the pharmaceutical industry as a whole over a relatively long period (1976-87) shows returns that were higher than returns on nonpharmaceutical firms by about 2 to 3 percentage points per year after adjustment for differences in risk among fins. This is a much lower differential than is suggested by conventional comparisons of profit ratios, but it is still high enough to have made the industry a relatively lucrative investment. 

Profitability ratios indicate a firm s management of both income and assets. 

Consider a profit ratio. Typically, ISEs have worked to reduce the inputs (the denominator) of the profit ratio by driving costs down and increasing efficiency. Eocusing ISEs on outcomes (the nu-... 

ISEs and the ISE function will be required to explain our contribution in terms of the profit ratio. It won t be enough to say that we improved the efficiency of a process or work cell. We will have to demonstrate how our actions lead to filling the treasure chest. 

Apart from a rating one could target the balance sheet as an indicator for bondholder value.Many evaluations of creditworthiness are based on financial ratios (e.g., debt to equity ratio, liquidity or profitability ratios).Measuring bondholder value in this way is always due to delay Balance sheets of listed corporations are published quarterly at... 

The sulfur industry is even more concentrated than the copper industry, and, like the latter, has been characterized by cartel agreements, rigid prices, and comparatively high profit ratios for the leading companies, according to the Commission s Report on the Sulfur Industry and International Cartels, transmitted to Congress June 16, 1947. 

Profitability ratios are used to measure managements effectiveness in generating returns on sales and return on stockholder financing. Information from the income statement is used to calculate these ratios and they are typically represented as percentages. 

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