Question

What are the 3 Profitability Ratios (is the company earning enough on the assets / equity given to the business)?

Answer 1

The 3 key profitability ratios include return on assets (ROA), return on equity (ROE), and profit margin, which are essential metrics for evaluating a company's ability to generate earnings relative to its assets, equity, and sales.

Step-by-step explanation:

The question pertains to 3 profitability ratios that help determine if a company is earning sufficient returns on the assets or equity invested in the business. The three main profitability ratios to consider are the return on assets (ROA), the return on equity (ROE), and the profit margin.

The ROA measures how efficiently a company uses its assets to generate profit, which is calculated by dividing the net income by the total assets. The ROE assesses the ability of a company to generate profits from its shareholders' equity, and is found by dividing net income by shareholder's equity. Lastly, the profit margin indicates how much profit a company makes for every dollar of sales, which is determined by dividing net income by sales revenue.

These ratios are indicative of the company's financial health and its ability to bring returns to its shareholders. Businesses use these ratios to make strategic decisions on investments, operations, and in communicating financial performance to investors and stakeholders.

Answer 2

Profitability ratios assess a company's efficiency in generating earnings from its assets and equity. Key ratios include Return on Assets, Return on Equity, and Profit Margin. These reflect the company's performance and impact investor decisions in a firm with many shareholders.

Step-by-step explanation:

Profitability ratios are crucial financial metrics that indicate how well a company is using its resources to generate earnings relative to its revenue, assets, or shareholders' equity. Specifically, when a company is owned by a large number of shareholders, it is essential to gauge the company's effectiveness in generating profit, which often translates into the value provided to the shareholders. Three key profitability ratios are:

1. Return on Assets (ROA): This measures the efficiency with which a company uses its assets to generate net income. It's calculated as Net Income divided by Average Total Assets.
2. Return on Equity (ROE): This ratio quantifies the rate of return on the shareholders' equity. ROE is determined by dividing Net Income by Average Shareholders' Equity.
3. Profit Margin: It indicates the percentage of revenue that has turned into profit. Calculated by dividing Net Income by Revenue.

The answers to the three broad questions when a company has many shareholders involve understanding how the company raises funds through the sale of stock, the expected rate of return promised to the investors, and the governance structure dictating who makes key corporate decisions. Enhancing profitability ratios is, in some way, a response to these concerns as they reflect the company's performance and attractiveness to investors.