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

Define a convertible bond, Define a Convertible Bond A convertible bond...

Define a Convertible Bond A convertible bond issue permits the investor to exchange the bond for a pre-defined number of equity shares of the issuer.  The convertible bond’s fl

Semi-strong-form of efficiency, Semi-Strong form level of Efficiency This...

Semi-Strong form level of Efficiency This level states that share prices reflects all available public information. (past and present information). If the market has achieved thi

What do you mean by shares, Q. What do you mean by Shares? Shares: issu...

Q. What do you mean by Shares? Shares: issue of the share is the most important source of the long terms capital. A company can issue various type of the share as the equity an

Why do financial managers calculate the marginal tax rate, Why do financial...

Why do financial managers calculate the marginal tax rate? Financial managers utilize marginal tax rates to calculate the future after-tax cash flows from investments.  Ever si

Explain the benefits and drawbacks of financial hedging, What are the benef...

What are the benefits and drawbacks of financial hedging of the firm’s operating exposure vis-a-vis operational hedges (like relocating manufacturing site)? Answer:  Financial he

Define stress testing and leverage, Lehman Brothers Holdings was a global f...

Lehman Brothers Holdings was a global financial services firm which, until declaring bankruptcy in 2008, participated in business in investment banking, equity and fixedincome sale

What are the financial management problems, What are the financial manageme...

What are the financial management problems Traditional approach was challenged was that the treatment was built too closely around episodic events, like incorporation, promotio

What are classes of institutions that issue bonds in the usa, What are the ...

What are the main classes of institutions that issue bonds in the USA? There are three major classes of institutions which issue bonds in the USA: national governments, local g

Explain the political events in a host country, Discuss the different ways ...

Discuss the different ways political events in a host country may affect local operations of an MNC. Answer:  The answer can be organized based on the three types of political ri

Compute the discount and premium, Suppose the bid-ask spot prices for one B...

Suppose the bid-ask spot prices for one British pound are $1.50 and $1.60 respectively. 1. Compute the bid-ask prices for one US dollar in terms of British pound. 2. Suppose

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