Profitability, Efficiency, and Operating Ratios
The bottom line on the common size income statement is the Net Profit Margin:
Net Profit Margin = Net Income
Net Revenue
This ratio expresses net income as a percentage of sales, and it is a good indicator of overall profitability. The net profit margin may be very telling when compared to net profit margins of similar companies.
The net profit margin is also a component of the return on assets (ROA) and return on equity (ROE) ratios, which are additional measures of profitability and efficiency presented in the following sections.
Asset Turnover = Net Revenue
Total Assets
The Asset Turnover Ratio measures the ability to generate revenues based on total assets. Average total assets may be substituted in the denominator to adjust for seasonal variations or anomalous asset totals. Asset turnover for Smith Heating and Cooling, Inc. is 1.42 times.
This ratio is useful when compared to prior years and especially when compared with other companies in the same industry. Along with the net profit margin, the asset turnover ratio is a component of ROA and ROE.
Net Profit Margin = Net Income
Net Revenue
This ratio expresses net income as a percentage of sales, and it is a good indicator of overall profitability. The net profit margin may be very telling when compared to net profit margins of similar companies.
The net profit margin is also a component of the return on assets (ROA) and return on equity (ROE) ratios, which are additional measures of profitability and efficiency presented in the following sections.
Asset Turnover = Net Revenue
Total Assets
The Asset Turnover Ratio measures the ability to generate revenues based on total assets. Average total assets may be substituted in the denominator to adjust for seasonal variations or anomalous asset totals. Asset turnover for Smith Heating and Cooling, Inc. is 1.42 times.
This ratio is useful when compared to prior years and especially when compared with other companies in the same industry. Along with the net profit margin, the asset turnover ratio is a component of ROA and ROE.
Posted by Ken Pirok at 9/8/2008 12:35 PM 
Categories: Profitability, Margins, Return on Assets, ROA and ROE, Return on Sales, Return on Equity, Common Size, Ratios
Categories: Profitability, Margins, Return on Assets, ROA and ROE, Return on Sales, Return on Equity, Common Size, Ratios
Return on Sales is another measure of profitability and efficiency. Return on sales is similar to net profit margin except that interest and taxes are added back to the numerator:
Return on Sales = Net Income before interest and income taxes
Net Revenue
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