Operating Profitability Ratios

## Financial Ratios

#### Operating Profitability Ratios

•        Operating profitability is a measure of profit in a company. It is used to measure a company's performance. Profitability is simply the capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs and expenses related to earning the income.

Gross profit margin (GPM)

Gross margin is net sales less the cost of goods sold. The amount of gross margin earned by a business dictates the level of funding left with which to pay for selling and administrative activities, financing costs, and dividend payments to investors.

Gross Profit Margin = (Net sales - Cost of goods sold) / Net sales

Operating margin (OM)

The operating profit margin ratio indicates operating profit of a company. Operating profit means profit after paying for variable costs of production such as wages, raw materials, etc.

Operating profit margin = Operating income ÷ Total revenue

Operating Income = gross profit – operating expenses

EBITDA Margin

It is a company's operating cash flow based on data from the company's income statement. It means earning before the deduction of interest expenses, taxes, depreciation, and amortization.

EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortization)

Pre-Tax Margin (EBT margin)

It is a company’s profitability before the tax calculation.

Pre-Tax Operating Income = Gross Revenue - Operating Expenses – Depreciation

Net Margin

The amount of profit a business receives for each unit of sales is called as Net margin.

Net margin = net income/sales

Contribution margin

Contribution margin means how much of a company's revenues will be contributing to the fixed expenses and net income.

Contribution margin = contribution/sales

• #### Operating Profitability Ratios

•   Asset Turnover Ratio

Asset turnover ratio is the measure of a company's sales to its assets. It is used to measure how efficiently the company is using its assets to generate revenue.

Total asset turnover ratio, fixed asset turnover ratio and working capital turnover ratio are come under the category of asset turnover ratio. In all cases the numerator is the same i.e. net sales (both cash and credit) but denominator is average total assets, average fixed assets and average working capital respectively.

Total Asset Turnover Ratio

It measures the efficiency of a company to use its assets to generate sales. This ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets.

Total asset turnover = net sales /average total assets

Fixed Turnover Ratio

It compares the sales income of a company with its fixed assets. It is used to measure how effectively and efficiently a company is using its fixed assets to generate profit. Fixed assets are important because they usually represent the largest component of total assets.

Fixed-asset turnover = net sales /average net fixed assets

Equity Turnover Ratio

Equity turnover is a ratio that measures the proportion of a company's sales to its stockholders' equity.

Equity turnover = net sales /average total equity