Financial Statement

Analysis
CHARLES H. GIBSON

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 Chapter
8

Profitability

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Net Profit Margin
• Also
  referred to as return on sales
• Reflects net income dollars generated by each
dollar of sales
• Net profit Margin=

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Total Asset Turnover
• Measures the activity of the assets and the
ability of the firm to generate sales through the
use of the assets

Net Sales
Total Asset Turnover =
Average Total Assets

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Return on Assets
• Measures
  the ability to utilize assets to create
profits
• Return on Assets=

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DuPont Return on Assets
• DuPont analysis separates return on assets into
net profit margin and total asset turnover
• Separating the ratio into the two elements allows
for improved analysis of the causes for the
change in the percentage of return on assets
Return on Assets = Net Profit Margin  Total Asset Turnover

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DuPont Return on Assets—Continued

Return on Net Profit Total Asset

Assets = Margin × Turnover
Firm A
Year 1 10% = 4.0% × 2.5
Year 2 8% = 4.0% × 2.0

Firm B
Year 1 10% = 4.0% × 2.5
Year 2 8% = 3.2% × 2.5

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Return on Equity
• Measures
  the return to the common stockholder
• Return on Equity=

Common equity = Total Stockholders’ Equity

− Preferred Capital −
Noncontrolling Interest

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product or service or otherwise on a password-protected website for classroom use.