Unit 3 — Working With Financial Statements G5

Profitability & Market Value Ratios

Profitability: Profitability Ratios

Measure how effectively a company generates profit from its sales, assets, and equity.

Profitability: Profit Margin Formula

Net Income ÷ Sales.

Profitability: Profit Margin Meaning

Shows the percentage of each sales dollar the company keeps as net income after expenses.

Profitability: 13.78% Profit Margin Meaning

The company earns about $0.1378 in net income for every $1 of sales.

Profitability: Return on Assets (ROA) Formula

Net Income ÷ Total Assets.

Profitability: Return on Assets Meaning

Measures how effectively the company uses its assets to generate profit.

Profitability: Return on Equity (ROE) Formula

Net Income ÷ Total Equity.

Profitability: Return on Equity Meaning

Measures how much profit the company generates from shareholders' equity.

Market Value: Market Value Ratios

Relate a company's financial performance to the market value of its stock.

Market Value: P/E Ratio Formula

Price Per Share ÷ Earnings Per Share

Market Value: P/E Ratio Meaning

Shows how much investors are willing to pay for $1 of the company's earnings.

Market Value: Higher P/E Ratio

Often indicates investors expect stronger future growth.

Market Value: Book Value Per Share Formula

Total Equity ÷ Shares Outstanding.

Market Value: Market-to-Book Ratio Formula

Market Value Per Share ÷ Book Value Per Share.

Market Value: Market-to-Book Ratio Meaning

Compares the market's valuation of the company's stock with its accounting book value.