10 Profit Ratios every investor should know:
1: Gross Margin
➡️ What: The percentage of revenue that is translated into gross profit.
🟰 Formula: Gross Profit / Sales
➡️ What: The percentage of revenue that is translated into gross profit.
🟰 Formula: Gross Profit / Sales
2: Operating Margin
➡️ What: The percentage of sales that turn into operating income.
🟰 Formula: Operating Income / Sales
➡️ What: The percentage of sales that turn into operating income.
🟰 Formula: Operating Income / Sales
3: Net Profit Margin
➡️ What: Percentage of sales that remains as profit after all costs are subtracted.
🟰 Formula: Net Income / Sales
➡️ What: Percentage of sales that remains as profit after all costs are subtracted.
🟰 Formula: Net Income / Sales
4: Free Cash Flow Margin
➡️ What: The percentage of sales translated into free cash flow.
🟰 Formula: Free Cash Flow / Sales
➡️ What: The percentage of sales translated into free cash flow.
🟰 Formula: Free Cash Flow / Sales
5: Return On Assets (ROA)
➡️ What: How much profit a company generates from its total assets.
🟰 Formula: Net Income / Total Assets
➡️ What: How much profit a company generates from its total assets.
🟰 Formula: Net Income / Total Assets
6: Return On Equity (ROE)
➡️ What: Measures how profitable a company is in relation to its equity (the money shareholders have invested in the business).
🟰 Formula: Net Income / Equity
➡️ What: Measures how profitable a company is in relation to its equity (the money shareholders have invested in the business).
🟰 Formula: Net Income / Equity
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7: Return On Invested Capital (ROIC)
➡️ What: Shows you how efficiently a company is allocating capital.
🟰 Formula: NOPAT / Total Invested Capital
➡️ What: Shows you how efficiently a company is allocating capital.
🟰 Formula: NOPAT / Total Invested Capital
8: Return On Capital Employed (ROCE)
➡️ What: Measures the profitability of a company and the efficiency with which it uses its capital.
🟰 Formula: EBIT / Long-Term Debt + Equity
➡️ What: Measures the profitability of a company and the efficiency with which it uses its capital.
🟰 Formula: EBIT / Long-Term Debt + Equity
9: Free Cash Flow Conversion
➡️ What: Measures how much earnings are translated into free cash flow
🟰 Formula: Free Cash Flow / Net Income
➡️ What: Measures how much earnings are translated into free cash flow
🟰 Formula: Free Cash Flow / Net Income
10: Owner's Earnings
➡️ What: Measures how much cash can be taken out of the business and given to owners
🟰 Formula: Net Income + (Depreciation & Amortization) +/- Non Cash Charges - Maintenance Capex +/- Changes in working capital
➡️ What: Measures how much cash can be taken out of the business and given to owners
🟰 Formula: Net Income + (Depreciation & Amortization) +/- Non Cash Charges - Maintenance Capex +/- Changes in working capital
Here's a handy summary (with 4 extra profit formulas):
Want to dive deeper into financial statements?
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