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Profitability Factors

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Net Income Margin

The net income margin measures the portion of net income or profit is generated as a percentage of revenue.

net income margin (net_mgn) = (net income – extraordinary items and discontinued operations) / revenue*100
net income margin TTM (net_mgn_ttm) = (net income – extraordinary items and discontinued operations) 12 month average / revenue 12 month average *100
Revenue MUST be POSITIVE.

Gross Income Margin

Gross income margin is a profitability ratio that measures how much revenues is left over after paying cost of goods sold (COGS). Gross profit margin is calculated by subtracting cost of goods sold (COGS) from total revenue and dividing that number by total revenue.

Gross income margin (gross_mgn) = (revenue – cost of goods sold) / revenue*100
Gross income margin TTM (gross_mgn_ttm) = (revenue ttm – cost of goods sold ttm) / revenue 12 month average *100
Revenue MUST be POSITIVE.

Pretax Margin

Pretax Margin measure the operating efficiency of a company by telling the percentage of sales that has turned into profits.

Pretax Margin (ptx_mgn) = pretax income / revenue *100
Pretax Margin TTM (ptx_mgn_ttm) = pretax income 12 month average / revenue 12 month average *100
Revenue MUST be POSITIVE.

Gross Profits to Assets Ratio

Gross Profits to Assets Ratio is a profitability ratio to measure the productivity of the company’s assets.

Gross Profits to Assets Ratio (gross_assets) = (revenue – cost of goods sold) / assets*100
Gross Profits to Assets Ratio TTM (gross_assets_ttm) = (revenue ttm – cost of goods sold ttm) / assets *100
Assets MUST be POSITIVE.

Gross Profits to Lagged Assets Ratio

Gross Profits to Lagged Assets Ratio is similar to Gross Profits to Assets Ratio. It used pervious quarter assets as denominator since the profits was created under the assets in previous period.

Gross Profits to Lagged Assets Ratio (gross_lag_assets) = (revenue – cost of goods sold) / assets in quarter t-1 *100
Gross Profits to Lagged Assets Ratio TTM (gross_lag_assets_ttm) = (revenue ttm – cost of goods sold ttm) / assets in quarter t-1 *100

EBITDA (Operating Profit Before Depreciation) Margin

EBITDA (Operating Profit Before Depreciation) margin is a profitability ratio that measures how much earnings the company is generating before interest, taxes, depreciation, and amortization, as a percentage of revenue.

EBITDA margin (opdb_mgn) = Operating Profit Before Depreciation / revenue *100
EBITDA margin TTM (opdb_mgn_ttm) = Operating Profit Before Depreciation 12 month average / revenue 12 month average *100
Revenue MUST be POSITIVE.

EBIT (Operating Profit After Depreciation) Margin

EBIT (Operating Profit After Depreciation) margin is a financial ratio that measures the profitability of a company calculated without taking into account the effect of interest and taxes.

EBIT margin (opad_mgn) = Operating Profit After Depreciation 12 month average / revenue 12 month average *100
EBIT margin TTM (opad_mgn_ttm) = Operating Profit After Depreciation 12 month average / revenue 12 month average *100
Revenue MUST be POSITIVE.

Cash Flow Margin

Cash Flow Margin profitability ratio that measures how well a company can convert sales into cash.

Cash Flow Margin (cf_mgn) = (net income – extraordinary items and discontinued operations + depreciation and amortization) / revenue *100
Cash Flow Margin TTM (cf_mgn_ttm) = (net income – extraordinary items and discontinued operations + depreciation and amortization) 12 month average / revenue 12 month average *100
Revenue MUST be POSITIVE.

Cash Flow to Assets Ratio

Cash Flow to Assets Ratio is an efficiency ratio that rates actually cash flows to the company assets without being affected by income recognition or income measurements.

Cash Flow to Assets Ratio (cf_assets) = (net income – extraordinary items and discontinued operations + depreciation and amortization) /assets*100
Cash Flow to Assets Ratio TTM (cf_assets_ttm) = (net income – extraordinary items and discontinued operations + depreciation and amortization) 12 month average /assets *100
Assets MUST be POSITIVE.

Cash Flow to Lagged Assets Ratio

Cash Flow to Lagged Assets Ratio is similar to Cash Flow to Assets Ratio. Instead of using same period assets as denominator, this ratio use cash flow scaled by previous assets.

Cash Flow to Lagged Assets Ratio (cf_lag_assets) = (net income – extraordinary items and discontinued operations + depreciation and amortization) /assets in quarter t-1 *100
Cash Flow to Lagged Assets Ratio TTM (cf_lag_assets_ttm) = (net income – extraordinary items and discontinued operations + depreciation and amortization) 12 month average / assets in quarter t-1 *100
Assets MUST be POSITIVE.

Return on Assets

Return on assets is a financial ratio that shows how efficient a company’s management is at using its assets to generate earnings. We will use the average of current and previous quarter’s assets as denominator.

Return on assets (roa) = (net income – extraordinary items and discontinued operations) / ((assets + assets in quarter t-1)/2)*100
Return on assets TTM (roa_ttm) = (net income – extraordinary items and discontinued operations) 12 month average / ((assets + assets in quarter t-1)/2)*100
Assets MUST be POSITIVE.

Return on Equity

Return on equity is a measure of financial performance calculated by dividing net income by shareholders’ equity. The ratio is considered a measure of how effectively management is using a company’s assets to create profits. We will use the average of current and previous quarter’s equity as denominator.

Return on equity (roe) = (net income – extraordinary items and discontinued operations) / ((equity + equity in quarter t-1 )/2)*100
Return on equity TTM (roe_ttm) = (net income – extraordinary items and discontinued operations) 12 month average/ ((equity + equity in quarter t-1 )/2)*100
Equity MUST be POSITIVE.

Return on Net Operating Assets

Return on Net Operating Assets is a financial ratio used by analysts to evaluate company performance. The ratio shows how well a company and its management are deploying assets in economically valuable ways. We will use the average of current and previous net operating assets as denominator.

Net operating assets (noa) = (assets – cash and short-term investments) – (liabilities – debt)
Return on Net Operating Assets (rnoa) = (net income – extraordinary items and discontinued operations) / ((noa + noa in quarter t-1)/2) *100
Noa MUST be POSITIVE.

Operating Profits to Equity Ratio

Operating Profits to Equity Ratio measure operating profitability as total revenue minus cost of goods sold minus selling, general, and administrative expenses and minus interest expense scaled by book equity.

Operating profit for equity (op) = revenue – cost of goods sold – selling, general and administrative expenses – interest expense
Operating Profits to Equity Ratio (op_equity) = operating profit / equity *100
Operating Profits to Equity Ratio TTM (op_equity_ttm) = operating profit 12 month average / equity *100
Equity MUST be POSITIVE.

Operating Profits to Lagged Equity Ratio

Operating Profits to Lagged Equity Ratio is similar to Operating Profits to Equity Ratio. We will use previous quarter equity as denominator.

Operating profit for equity (op) = revenue – cost of goods sold – selling, general and administrative expenses – interest expense
Operating Profits to Lagged Equity Ratio (op_lag_equity) = operating profit / equity in quarter t-1 *100
Operating Profits to Lagged Equity Ratio TTM (op_lag_equity_ttm) = operating profit 12 month average / equity in quarter t-1 *100
Equity MUST be POSITIVE.

Operating Profits to Assets Ratio

Operating Profits to Assets Ratio calculated as total revenue minus cost of goods sold minus selling, general, and administrative expenses and plus research and development expenditures scaled by book assets.

Operating profitability for assets (op) = revenue – cost of goods sold – selling, general and administrative expenses + research & development expense
Operating Profits to Assets Ratio (op_assets) = operating profit / assets *100
Operating Profits to Assets Ratio TTM (op_assets_ttm) = operating profit 12 month average / assets *100
Assets MUST be POSITIVE.

Operating Profits to Lagged Assets Ratio

Operating Profits to Lagged Assets Ratio is similar to Operating Profits to Assets Ratio. We will use previous quarter assets as denominator.

Operating profit for equity (op) = revenue – cost of goods sold – selling, general and administrative expenses + research & development expense
Operating Profits to Lagged Assets Ratio (op_lag_equity) = operating profit / assets in quarter t-1 *100
Operating Profits to Lagged Assets Ratio TTM (op_lag_equity_ttm) = operating profit 12 month average / assets in quarter t-1 *100
Assets MUST be POSITIVE.

Cash-Based Operating Profits for Assets to Assets Ratio

Operating profitability better explains the cross section of expected returns compares to gross profitability and net income. However, some firms are more profitable only because of an increase in the non-cash portion of earnings. Thus, cash-based operating profitability, which purging accruals from operating profitability, will be an effective indicator of company’s profitability that subsumes the accrual anomaly.

Cash-based operating profitability for assets (cbopa) = revenue – cost of goods sold – other selling, general & administrative expense – change in revenue – change in inventory + change in deferred revenue + change in accounts payable
Cash-Based Operating Profits for Assets to Assets Ratio (cbopa_assets) = cbopa / assets *100
Cash-Based Operating Profits for Assets to Assets Ratio TTM (cbopa_assets_ttm) = cbopa 12 month average / assets *100
Assets MUST be POSITIVE.

Operating Leverage (Operating Costs to Assets Ratio)

In operating leverage hypothesis, firm’s value consists of currently deployed asset(Va) and growth options(Vg). The value of deployed assets consists of the capitalized value of the revenues(Vr) they generate minus the capitalized cost(Vc) of operating the assets. While growth options are almost always riskier than revenues from deployed capital in real options models, the presence of operating costs allows for deployed assets that are riskier than growth options. Operating costs-to-assets can be used as proxy for operating leverage(Vc/Vr). The hypothesis predicts that high operating leverage firms earn higher returns, because their assets-in-place are more levered,and thus riskier.

Operating Costs to Assets Ratio (oc_assets) = (cost of goods sold + selling, general and administrative expenses) / assets *100
Assets MUST be POSITIVE.

 

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