Profitability ratios, Financial Management

Assignment Help:

A holder in debt obligation, though does not have any opportunity to share in the economic growth of the firm, is interested in a firm's profitability because it is from revenue that a firm will continue to grow in order to generate cash flow to meet obligations.

Profitability ratios are used to find out the underlying causes of a change in the company's earnings. These ratios show the combined effects of liquidity and asset and debt management on the firm. For purpose of assessing the factors underlying the profitability of the firm, profitability ratios break earnings per share into its basic determinants. Understanding the underlying cause helps us to assess the adequacy of historical profits and to project future profitability.

There are no hard and fast rules to decide a fixed standard for these ratios. The standards for a given ratio vary according to operating characteristics of the company and the business condition that is prevailing at the time of analysis. Ratio analysis does not provide answers to questions but is utilized to raise significant questions requiring further analysis. Ratios should not be viewed in isolation but must be viewed in the context of ratios and facts derived from sources such as statement of cash flow.

DuPont formula is used by equity analysts to assess the determinants of a company's earnings per share (EPS). The probability ratios analyzed to assess EPS are:

  • Return on stockholders' equity
  • Return on total assets
  • Profit margin
  • Asset turnover.

Related Discussions:- Profitability ratios

Explain about the equity claims in the financial security, Explain about th...

Explain about the equity claims in the financial security. Equity classifies claims to shares into the net income and assets of a firm, and they do not contain a maturity date.

What is trustworthy collateral from the lenders'' perspective, What is trus...

What is trustworthy collateral from the lenders' perspective?Explain whether accounts receivable and inventory are trustworthy collateral. Assets that are readily marketable of

What is a digital certificate, QUESTION (a) Describe briefly the main s...

QUESTION (a) Describe briefly the main security measures to protect E-Banking systems and ensure secure E-Banking transactions. (b) (i) What is a digital certificate? (ii

Define advantages for a firm to cross list its equity shares, Discuss any a...

Discuss any advantages you can think of for a company to (1) cross-list its equity shares on much more than one national exchange, (2) To source new equity capital fro

Determine the types of users, Determine the Types of users Investors -loo...

Determine the Types of users Investors -look at the risk of their investment, future growth and profitability. Managers / employees-have access to more information and will want

Financial management and production department, The production department i...

The production department in any firm is concerned with provision of production facilities, production cycle, skilled and unskilled labor, storage of finished goods, capacity utili

Financial analysis, are footnotes important in analysing ratios

are footnotes important in analysing ratios

Enumerate the present value of an annuity, Enumerate the Present Value of a...

Enumerate the Present Value of an Annuity Present value of an annuity can be calculated by: Present Value = A [ {(1+i) n -1} / i (1+i) n ] Or to use the tables change

Explain about money market mutual funds, Q. Explain about Money Market Mutu...

Q. Explain about Money Market Mutual Funds? Money Market Mutual Funds: Money market mutual funds (MMMFs) focus on short-term marketable securities such as TBs, CPs, CDs or call

Need for working capital, Along with the fixed capital nearly every Small-S...

Along with the fixed capital nearly every Small-Scale industries requires working capital though the extent of working capital requirement differs in different businesses. Working

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd