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BU121 Week 8 Lecture 2.docx

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Wilfrid Laurier University
Laura Allan

BU121 Week 8 Lecture 2 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  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) Industry Comparable Analysis  Only indicates issues, not answers Cost-Volume-Profit Analysis  tool used for decision-making  shows effect of changes in Costs or Volumes on Profits – CVP Analysis  shows impact of Operating Leverage  degree to which locked into fixed operating costs ○ must sell more to cover fixed costs (RISK) ○ but once covered - leveraged effect on profit (RETURN) ○ also used for „Breakeven‟ Analysis  where Revenues = Expenses OR Rev-Exp=0  most important concept is contribution Thing
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