10. Profitability Analysis

What is another name for turnover ratios?

Activity ratios

What do activity / turnover ratios measure?

Measure a company’s efficiency in managing its assets.

What does asset turnover ratio measure?

Provides an indication of how efficiently a company utilizes its assets to generate revenue.

Is a higher or lower turnover ratio better?

Higher is better.

What do profitability ratios attempt to measure?

Attempts to measure a company's ability to earn an adequate return relative to sales or resources devoted to operations.

What are three common profitability measures?

1. Profit margin on sales

2. Return on assets

3. Return on equity

In the DuPont framework what is profitability measured by?

Profit margin

In the DuPont framework what is activity measured by?

Asset turnover

In the DuPont framework what is financial leverage measured by?

Equity multiplier.

What does a high equity multiplier indicate?

Indicates that relatively more of the company’s assets have been financed with debt; that is, the company is more leveraged.