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BU121 Lecture Notes - Asset, Tax Shield, Net Profit

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Roopa Reddy

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Profitability and Efficiency
- Measure how efficiently a company controls its expenses and assets
- Accounting-based measures of profitability is a standard place to examine a company’s value
Gross Profit Margin (COGS measures Variable costs)
- (net sales COGS)
Net sales
- =33.91 -> direct/fixed/overhead costs
- The other 66 is your variable cost to ….
Operating Profit Margin
- EBIT (earnings before interest and taxes)
Net sales
- Considering Operating expenses but not financing
- Profit within that year divided by net sales
- Higher the better
- The higher means you earn more money on your sales
Net Profit Margin
- Net income
Net sales
- Includes depreciation
- How much you truly earned
- More realistic than Operating Profit Margin
Level of interest affects tax we pay
NOPAT (Net operating profit after tax) only for comparison
- Compares 2 companies before the interest has been paid out
- EBIT(1-tax rate)
Net sales
- Allows you to compare companies who have different financing options e.g. one using debt vs.
one using equity
- Net profit after taxes
- Removes the interest benefit (to see what it was like without the tax shield)
Sales to Total Assets
- Net sales
Average total assets
- Determines how well you are using your assets
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