Net profit margin:
The net profit margin is computed by using sales and earnings from continuing operations. It is a measure of how efficient a company is in deriving its sales because a higher value means the net profit is high relating to sales, and costs were at minimum. Net profit reflects the amount of revenue left after accounting for all expenditures including interest payments and taxes.
Return on capital employed:
Where capital employed = Total assets (-) Current liabilities
Capital employed represents the capital investments necessary for a business to function. That is why current liabilities which can be demanded at any time are excluded when calculating the capital employed. It should be noted that it is not a measure of assets, but of capital investments, stocks or shares and long term liabilities.
Return on owners equity: This ratio is for the common stockholder, the owner of the business and is of significant importance to him. It indicates the rate of return that management has earned on the capital provided by stockholders after accounting for payment to all capital suppliers.
ROE = The purpose of this ratio is to measure the profitability of a company in terms of percentage of revenue after tax generated with shareholder’s money or investments. The formula is:
Debt to Equity ratio: This ratio measures the funds provided by creditors versus the funds provided by owners. The formula is:
The debt figure contains all the long term fixed obligations including subordinated convertible bonds. It is inclusive of deferred taxes which may occur from a change in accounting policies such as depreciation and others, and also in the case of a lease, the present value of lease obligations is recognized as a long term liability.
Total equity is inclusive of preference stocks and common equity and retained earnings. This ratio is used to gauge how much debt a company is using to finance its assets relative to the amount of value represented in shareholder’s equity.
Note, most people use total debt/ liability instead of just long term liabilities. From the explanation above, we can deduce the formula of debt-equity ratio as:
Leave a Reply