Profitability ratios, Financial Management

A holder in debt obligation, though does not have any opportunity to share in the economic growth of the firm, is interested in a firm's profitability because it is from revenue that a firm will continue to grow in order to generate cash flow to meet obligations.

Profitability ratios are used to find out the underlying causes of a change in the company's earnings. These ratios show the combined effects of liquidity and asset and debt management on the firm. For purpose of assessing the factors underlying the profitability of the firm, profitability ratios break earnings per share into its basic determinants. Understanding the underlying cause helps us to assess the adequacy of historical profits and to project future profitability.

There are no hard and fast rules to decide a fixed standard for these ratios. The standards for a given ratio vary according to operating characteristics of the company and the business condition that is prevailing at the time of analysis. Ratio analysis does not provide answers to questions but is utilized to raise significant questions requiring further analysis. Ratios should not be viewed in isolation but must be viewed in the context of ratios and facts derived from sources such as statement of cash flow.

DuPont formula is used by equity analysts to assess the determinants of a company's earnings per share (EPS). The probability ratios analyzed to assess EPS are:

  • Return on stockholders' equity
  • Return on total assets
  • Profit margin
  • Asset turnover.
Posted Date: 9/10/2012 9:17:38 AM | Location : United States







Related Discussions:- Profitability ratios, Assignment Help, Ask Question on Profitability ratios, Get Answer, Expert's Help, Profitability ratios Discussions

Write discussion on Profitability ratios
Your posts are moderated
Related Questions
Briefly discuss some variants of the basic interest rate and currency swaps. Answer:  In place of the basic fixed-for-floating interest rate swap, there are as well zero-coupo

what is the applicability of the operating cycle in a vegetaion farm in Uganda

Q. Show the Objectives of Inventory Management? Objectives of Inventory Management- The objectives of Inventory Management are: To maintain a adequate large size of inventor

Out of Cash Calculated by taking organization cash on hand divided by its burn rate, yielding the time period that the organization will have enough cash to cover what it wants

Degree of Operating Leverage A measure of the firm's operating leverage, which is calculated as the contribution margin distributed by income before taxes. A rigid with a high

Q. What do you signify by Organisation of Finance Function? Describe the functions of Financial Manager. Ans. Organisation of Finance Function: - Organization of finance functi

Net Present Value (NPV) : In this technique, future cash flows are discounted to the present and then compared with the investment outlay. The basic discount rate is generally

A holder in debt obligation, though does not have any opportunity to share in the economic growth of the firm, is interested in a firm's profitability because it

Explain how the advent of the euro would affect international diversification strategies. Answer: As the euro-zone will have similar exchange-rate policies and monetary, the co

Define the term- Cost of capital Cost of capital is the rate of return a firm should earn on its investments for the market value of the firm to remain unchanged. Acceptance of