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Profitability and Efficiency

Measures how efficiently a venture controls its expenses and uses its assets

o Better we control our expenses, the more profitable we will be

o How well are we using our assets?

Accounting-based measures of profitability are a standard starting point for

examining venture value

Gross Profit Margin

= (net sales – cost of goods sold) / net sales

=33.91%

As a percentage of my sales, what percent am I grossing on it?

Operating Profit Margin

= EBIT / net sales

= 8.17%

Net Profit Margin

= net income / net sales

= 3.3%

NOPAT Margin

= EBIT (1-tax rate) / net sales

=5.72%

Net Operating Profit After Taxes

Removes impact of leverage and interest tax shield

Interest tax shield: benefit you get from taxes because of the interest

Sales-to-Total Assets

= net sales / average total assets

=1.46x

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What sales are we getting for the assets we had to invest?

Operating Return on Assets

= EBIT / average total assets

The venture‟s basic earning power

Needs to be > interest to benefit from leverage

=11.91%

Take the actual interest rate on the income statement and compare that to the

interest they are paying

Return on Assets (ROA)

= net income / average total assets = 4.8%

Total return on assets depends on sales making on those assets and the return your

making on the sales

OR ROA Model

Represents ROA as the joint outcome of two distinct aspects of the venture‟s

operations

= net profit margin x sales-to-total assets

= net income / net sales x net sales / average total assets

Return on Equity (ROE)

= net income / average owners‟ equity = 12.46%

Shows magnifying effect of leverage

OR ROE Model

Represents ROE as the outcome of the ROA Model and the Equity Multiplier

= ROA x Equity Multipler

= net profit margin x sales-to-total assets x equity multiplier

= (net income / net sales) x (net sales / average total assets) x ( avg total assets /

average

owners equity)

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