•
total asset
turnover = sales / total assets
•
fixed asset turnover = sales / fixed assets
•
equity turnover = sales / equity
Operating profitability ratios look at how good management is at turning their efforts into
profits.
Gross profit margin = gross profits / sales.
Operating profit margin = operating profit / sales, this ratio is also written as EBIT / sales
Net profit margin = EAT / sales, also know the before tax profit margin = EBT / sales
Return on total capital = [EAT + interest] / capital
Return on owners equity = ROE = EAT / equity
Measures of a company’s risk profile
Business risk is related to the firm’s industry, the variability of sales due to the firm’s
products, customers and method of doing business.
1.
Business risk = [standard deviation of operating income] / [mean operating income]
2.
Sales variability = coefficient of variation of sales, sales variability = [standard
deviation
of sales] / [mean sales]
3.
Operating leverage =
?
[ave % change in operating earn]/[ave % change in sales]
?
Financial risk occurs on top of business risk. Financial risk is related to the uncertainty
caused by the fixed cost associated with borrowed money.
Leverage ratios show where the money comes from:
a.
debt to equity ratio = total long-term debt / equity
b.
assets to equity ratio = assets / equity also called the financial
leverage multiplier
c.
debt to capital ratio = total long-term debt / total long-term capital
d.
total debt ratio = [long-term + short-term debt] / total capital.
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