Ratio analysis – Profitability ratios

30 Sep No Comments

Ratio analysis: Profitability ratios

Cash return on sales ratio indicates a company’s ability to turn sales into cash.

Cash return on sales ratio is found by dividing cash from operating activities by net sales.

Cash return on sales ratio = Cash from operating activitiesNet sales
  = $119,300$255,000
  = 0.46784…
  = 0.47     (Rounded to two decimal places)

To convert 0.47 to a percentage, multiply 0.47 × 100% = 47%. 

The return on stockholders’ equity ratio measures the profitability of an entity based on the common stockholders’ equity.

Return on common stockholders’ equity ratio is computed by dividing net income (less preferred dividends, if any), by the average common stockholders’ equity (beginning common stockholders’ equity plus ending common stockholders’ equity, all divided by two):

Return on common stockholders’ equity ratio = Net income – Preferred dividendsAverage common stockholders’ equity
  = $58,500($286,000 + $345,500) / 2
  = 0.18527…
  = 0.19     (Rounded to two decimal places)

To convert 0.19 to a percentage, multiply 0.19 × 100% = 19%. 

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