Profitability Ratios The following ratios are commonly used to analyze profitabi
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Profitability Ratios
The following ratios are commonly used to analyze profitability. Note that each ratio compares net income to some other financial aspect of the company. Because each ratio reveals something different about a company's income, they are best used in tandem so that a broad understanding of a company's profitability can be obtained.
Profitability Ratio Relationship
Profit Margin Income to Sales
Return on Equity Income to Stockholder’s Equity
Return on Assets Income to Total Assets
Earnings per Share Income to Shares Outstanding
Price to Earnings Stock Price to Income
Choose a company to evaluate. Select three of the ratios shown above and calculate the performance being sure to include the components of the formula.
Provide a clear discussion of what the results tell you about the financial health of the organization. Were you aware of the company’s performance in these areas?
Explain three facts that you learned about the company.
Directions to student: The final paragraph (three or four sentences) of your initial post should summarize the one or two key points that you are making in your initial response. Your main post must be two to three substantive paragraphs 150-200 total words and include at least two APA-formatted citations/references.
Explanation / Answer
Solution:
The profitability of the company should be analyzing properly to get the true picture of the performance of the business operation. Microsoft corporation is taken into consideration for the details analysis of profit by using various profitability ratio.
The relevant financial data of Microsoft Corporation:
Particulars
2017
2016
2015
Net Income
21204 million
16798 million
12193 million
Total Revenue
89950 million
85320 million
93580 million
Total Equity
72394 million
71997 million
80083 million
Total Assets
241086 million
193468 million
176223 million
(Source: financials.morningstar.com 2018)
Computation of profitability ratios:
Particulars
2017
2016
2015
Profit Margin
(Net Profit/Total Revenue)*100
23.57%
19.69%
13.03%
Return on Equity
(Net Income/Total Equity)*100
29.29%
23.33%
15.23%
Return on Assets
(Net Income/Total Assets)*100
8.80%
8.68%
6.92%
Profit Margin Ratio:
It represents the performance of the business operation of the company. In the instant case the profitability margin of Microsoft is increasing which is represents that the business is managed efficiently and effectively. In 2015 the percentage was 13.03% which is increased in 2017 to 23.57%.
Return on Equity:
It represents the interest of the shareholders in the company. The increase rate of return on equity encourage the investors to invest in the company (Nabi & Abbass 2018). The ratio of return on equity is increased in 2017 to 29.29%. In the year 2015 the same was 15.23%. The increase in return represents that the performance of the business is effective and the market capitalization of the company will increase.
Return on Assets:
This ratio represents the overall performance for the business. The higher return is appreciable. In the case of Microsoft Corporation, the same is also increased and it is helps the company to increase its goodwill and wealth of the shareholders (Caride, Bariviera & Lanzarini 2018).
Conclusion:
At the conclusion it can be said that the profitability ratios are one of the most important analysis tool to understand the performance of the business. So the same can be calculated and analyzed properly to make various business decisions to improve the overall performance of the business.
References:
Caride, M. I., Bariviera, A. F., & Lanzarini, L. (2018). Stock Returns Forecast: An Examination By Means of Artificial Neural Networks. In Complex Systems: Solutions and Challenges in Economics, Management and Engineering (pp. 399-410). Springer, Cham.
Financials.morningstar.com. (2018). Income Statement for Microsoft Corp (MSFT) from Morningstar.com. [online] Available at: http://financials.morningstar.com/income-statement/is.html?t=MSFT®ion=usa&culture=en-US [Accessed 5 Apr. 2018].
Nabi, A. A., & Abbass, H. (2018). Default Prediction and Financial Ratios: Evidence from Pakistani Textile Firms. Journal of Applied Finance and Economic Policy, 2(1), 1-9.
Particulars
2017
2016
2015
Net Income
21204 million
16798 million
12193 million
Total Revenue
89950 million
85320 million
93580 million
Total Equity
72394 million
71997 million
80083 million
Total Assets
241086 million
193468 million
176223 million
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