ROI and Profitability Calculations - Flashcard set - Entrepreneurship

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Return on Investment (ROI)

Formula:

ROI = \frac{\text{Net Profit}}{\text{Investment Cost}} \times 100\%

Application: Measures the efficiency of an investment or compares the efficiency of a number of different investments.

Net Profit Margin

Formula:

\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Revenue}} \times 100\%

Application: Illustrates how much of each dollar in revenue is translated into profit.

Gross Profit Margin

Formula:

\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Revenue}} \times 100\%

Application: Measures the financial health of a company by showing the proportion of money left over from revenues after accounting for the cost of goods sold.

Operating Margin

Formula:

\text{Operating Margin} = \frac{\text{Operating Income}}{\text{Revenue}} \times 100\%

Application: Indicates how much profit a company makes on a dollar of sales, after paying for variable costs of production, but before paying interest or tax.

Breakeven Point

Formula:

\text{Breakeven Point (units)} = \frac{\text{Fixed Costs}}{\text{Price per Unit} - \text{Variable Cost per Unit}}

Application: Calculates the number of units that must be sold to cover fixed and variable costs.

Earnings Per Share (EPS)

Formula:

\text{EPS} = \frac{\text{Net Income} - \text{Dividends on Preferred Stock}}{\text{Average Outstanding Shares}}

Application: Used to gauge a company's profitability on a per-share basis, common for public companies to report in their earnings.

Price-Earnings Ratio (P/E)

Formula:

\text{P/E Ratio} = \frac{\text{Market Value per Share}}{\text{Earnings Per Share (EPS)}}

Application: Helps investors determine the market value of a stock compared to the company's earnings.

Debt-to-Equity Ratio (D/E)

Formula:

\text{D/E Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholder's Equity}}

Application: Shows the proportion of equity and debt a company is using to finance its assets, and the ability to cover its debts in the long-term.

Current Ratio

Formula:

\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}

Application: Measures a company's ability to pay back its short-term liabilities with its short-term assets.

Quick Ratio (Acid-Test Ratio)

Formula:

\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}}

Application: Analyses a company's short-term liquidity, considering its more liquid assets which are quickly convertible to cash.

Return on Equity (ROE)

Formula:

\text{ROE} = \frac{\text{Net Income}}{\text{Shareholder's Equity}}\times 100\%

Application: Shows how much profit a company generates with the money shareholders have invested.

Return on Assets (ROA)

Formula:

\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}}\times 100\%

Application: Indicates how profitable a company is in relation to its total assets and how effective management is at using them to generate earnings.

Cash Conversion Cycle (CCC)

Formula:

\text{CCC} = \text{Days Inventory Outstanding (DIO)} + \text{Days Sales Outstanding (DSO)} - \text{Days Payable Outstanding (DPO)}

Application: Assess how effectively a company is managing its working capital by measuring the time between purchasing inventory and collecting cash from sales.

Days Sales Outstanding (DSO)

Formula:

\text{DSO} = \left(\frac{\text{Average Accounts Receivable}}{\text{Total Credit Sales}}\right) \times \text{Number of Days}

Application: Measures the number of days it takes on average for a company to collect payment after a sale has been made, a component of the cash conversion cycle.

Days Inventory Outstanding (DIO)

Formula:

\text{DIO} = \left(\frac{\text{Average Inventory}}{\text{Cost of Goods Sold}}\right) \times \text{Number of Days}

Application: Indicates the average number of days a company holds inventory before turning it into sales.

Days Payable Outstanding (DPO)

Formula:

\text{DPO} = \left(\frac{\text{Average Accounts Payable}}{\text{Cost of Goods Sold}}\right) \times \text{Number of Days}

Application: Reflects the average number of days a company takes to pay its bills and invoices, part of the cash conversion cycle.

Gross Profit

Formula:

\text{Gross Profit} = \text{Revenue} - \text{Cost of Goods Sold}

Application: Represents the total money retained by a company after deducting the costs associated with making and selling its products or services.

Operating Income

Formula:

\text{Operating Income} = \text{Gross Profit} - \text{Operating Expenses}

Application: Also known as Earnings Before Interest and Taxes (EBIT), it's a measure of a company's profit that includes all incomes and expenses except interest and income tax expenses.

Net Income

Formula:

\text{Net Income} = \text{Total Revenue} - \text{Total Expenses}

Application: Demonstrates a company's total profitability after accounting for all expenses, including taxes and interest, the bottom line of the income statement.

Working Capital

Formula:

\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}

Application: Measures a company's operational efficiency and short-term financial health.

Contribution Margin

Formula:

\text{Contribution Margin} = \text{Revenue} - \text{Variable Costs}

Application: Reveals how much of a company's revenue will contribute to fixed expenses and profit after covering variable costs.

Inventory Turnover

Formula:

\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}

Application: Shows how many times a company's inventory is sold and replaced over a period, a measure of sales and inventory efficiency.

Total Asset Turnover

Formula:

\text{Total Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}}

Application: Evaluates the efficiency of a company's use of its assets in generating sales revenue.

Interest Coverage Ratio

Formula:

\text{Interest Coverage Ratio} = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}}

Application: Assesses a company's ability to pay the interest on its outstanding debt.

Fixed Charge Coverage Ratio

Formula:

\text{Fixed Charge Coverage Ratio} = \frac{\text{EBIT} + \text{Fixed Charges before Tax}}{\text{Fixed Charges before Tax} + \text{Interest}}

Application: Determines a company's ability to satisfy fixed financing expenses such as interest and leases.

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