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

Talbot Enterprises recently reported an EBITDA of $8 million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was i

What are some of the government requirements imposed on a public corporation that are not imposed on a private, closely held corporation? Public corporations ought to tender au

Price an Asian call option with on a stock with the initial stock price $50 and volatility 30$. The strike price of the option is $52. The time to maturity of the option is 3 month

Q. Determine Earnings per share? Current earnings per share = 100 × (4550 - 225)/ 5000 = 86.5 cents Earnings per share after one year = 100 × (4508 - 225)/ 5000 = 85.7 cents

as a financial analyst, you must evaluate a proposed project to produce printer ink. the equipment would cost 60000 plus 10000 for installation. annual sales would be 5000 units at

Q. Explain the benefit plan? Cafeteria Plan - A benefit plan maintained by an employer for benefit of the employees underwhich every participant has the opportunity to select t

Explain the pricing spill-over effect. Suppose a firm operating in a segmented capital market (such as China, for example) decides to cross-list its stock in New York or London.

1. It is mandatory that every carrier transporting hazardous materials should display correctly the emergency information panel. Emergency information panel should be legibly and

A callable bond is the sale of a call option by the investor to the issuer as it allows the issuer to repurchase the bond from the time it becomes callable until