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
Let us look into few floaters that have constant quoted margin. 1. De-leveraged Floaters 2.  Inverse Floaters 3.  Dual-Indexed Flo

How does the deposit-loan rate spread in the Eurodollar market compare with the deposit-loan rate spread in the domestic U.S. banking system?  Why? Answer: The deposit-loan sprea

Q. What do you signify by Receivables Management? Ans. Receivable Management: - The term receivables refer to debt outstanding to the firm by the customers resulting from sale

Illustration  The monthly yield of a mortgage backed security is 0.75%. Find out the annual yield for this security. Solution Annual yield = 2 [(1 + 0

Z works for HS Company and has been asked to undertake an assessment of any health and safety issues that might be potential hazards in the department which she manages. Z's respon

evaluate the importance of leverage in financial management of a small scale company

Dual Aspect Concept - Accounting Principle This is, no doubt, the basic concept in accounting.  Under this concept, each transaction has got a two-fold aspect: (i) yielding

What are the advantages and the disadvantages of a new stock issue? A new stock issue increases funds and decreases the riskiness of the firm.  It as well tends to send a negat

Question: PART A With the view to modernise its accounting system Government is considering adopting International Public Sector Accounting Standards (IPSAS) so as to maxim

How does a preemptive right protect the interests of existing stockholders? A preventive right protects the interests of existing stockholders by giving them the opportunity to