| Profitability How profitable is the firm? How much is left over after all of its costs? |
| Gross Profit Margin | gross profit / sales | Measures the basic profit involved in making goods or providing services before administration advertising and other expenses are added. Expressed as a percent (such as 45.6% gross margin). |
| Operating Profit Margin | EBIT / sales where EBIT = earnings before interest and taxes | A more complete picture of profits, since this includes all operating costs involved in making goods or services. Even if firms have some difficulty coming up with positive net income (below), analysts expect them to show positive operating income. Expressed as a percent (such as 18.9%). |
| Net Profit Margin | net income / sales Net income is sometimes also noted as EAIT, or earning after interest and taxes. | Net income is the most often-reported measure of profit. (Also often called net earnings.) This is bottom line, accounting defined profit margin. Expressed as a percent (such as 12.7%). |
| Return on Assets (ROA) | net income / total assets | A measure of the productivity of assets. It is literally how much accounting profit the assets were able to generate. And its like a rate of return on those assets. Expressed as a rate of return or percent (such as a 10.5% return). |
| Return on Equity (ROE) | net income / equity | A measure or the productivity of shareholders investment in the firm. Its a rate of return earned on the stockholders equity.Expressed as a rate of return or percent (such as 15.2%). |
| Basic Earning Power | EBIT / total assets where EBIT = earnings before interest and taxes | Another measure of the productivity of assets, this time eliminating the impact of how those assets are financed (such as through borrowing and paying interest). This is essentially operating income, in other words, without interest or taxes. Expressed as a rate of return or percent (such as 15.2%). |
| Free Cash Flow | (net income + amortization and depreciation changes in working capital) capital expenditures Or: operating cash flow capital expenditures | Increasing, analysts evaluating companies want to know how much cash a company generates. Earnings (net income) are determined from accounting conventions, and it is possible for a company to have good profits, but little cash. But cash is what a firm needs to invest in new products, pay off debt, and overall improve shareholder value. Free cash flow essentially looks at what cash is left over after a company invests in capital projects. |
| Leverage (also called Long-term Solvency) How much debt is the firm using to finance its activities? |
| Debt Ratio | total liabilities / total assets | This will reveal the proportion of a companys assets that are financed by its total debt. Since total liabilities is used, this also includes some very short-term debt, such as 30-day invoices (current liabilities) the firm has yet to pay. Expressed as a decimal ratio or percent (such as debt ratio of .39, or 39% percent debt). |
| Long-term Debt to Total Capitalization | long-term debt / (long-term debt + total equity) | This provides a debt measure that eliminates short-term financing issues. Expressed as a decimal ratio or percent (such as a long-term debt ratio of .25 or 25%). |
| Debt to Equity | long-term debt / equity | Since assets are financed by either debt or equity, this ratio illustrates the relationship between each. Again, it usually includes only long-term debt financing. The higher this is, the more debt is used compared to equity and, presumably, the riskier the firm might be. Expressed as a number times (such as debt is 1.8 times equity). |
| Times-Interest-Earned | EBIT / annual interest expense | An indicator of companys ability to meet its interest payment obligations. Expressed as a number times (such operating income is 2.3 times interest). |
