PArT 1: INTrODuCTIONThe operating profit margin measures the percentage of each sales dollar remaining after deducting all
costs and expenses other than interest and taxes. As with the gross profit margin, the higher the operating
profit margin, in general, the better. This ratio tells analysts what a company’s bottom line looks like before
deductions for payments to creditors and tax authorities. GPC’s operating profit margin in 2016 is 11.9%:Operatingprofitmargin====
Operatingprofit
Sales$1,531
$12,8430.119 11.9%
The net profit margin measures the percentage of each sales dollar remaining after deducting all costs
and expenses including interest, taxes, and preferred share dividends. GPC’s net profit margin of 7.4%
in 2016 is calculated as follows:=
===
Net profitmargin
Earningsavailableforordinary shareholders
Sales
$946
$12,8430.074 7.4%
For the year that ended 30 June 2014, Cochlear, the Australian company manufacturing ear implants,
reported a net profit margin of 11.6%, more than twice the size of the 4% net profit margin reported by
Woolworths, an Australian food retailer, for the same period. This example shows how net profit margins
vary widely across industries.
Probably the most closely watched financial ratio of them all is earnings per share (EPS), which
the investing public considers to be an indicator of corporate success. The earnings per share measure
represents the number of dollars earned on behalf of each outstanding share of ordinary shares. Many
companies tie management bonuses to specific EPS targets. Earnings per share are calculated as follows:Earningsper share
Earningsavailableforordinary shareholders
Number ofsharesofordinary sharesoutstanding
$946
178 .7$5.29
=
==
The value of GPC’s earnings per share in 2016 is $5.29.^7 This figure represents the dollar amount
earned on behalf of each share of ordinary shares outstanding. Note that EPS is not the same as dividends.
The amount of earnings actually distributed to each shareholder is the dividend per share; as noted in
GPC’s income statement (Table 2.2), this value rose to $1.93 in 2016 from $1.76 in 2015.
The return on total assets (ROA), often called the return on investment (ROI), measures management’s
overall effectiveness in using the company’s assets to generate returns to ordinary shareholders. The
return on total assets for GPC in 2016 was equal to 9.9%:=
===
Returnontotalassets
Earningsavailableforordinary shareholders
Totalassets
$946
$9,5890.099 9.9%
A closely related measure of profitability is the return on ordinary equity (ROE), which captures the
return earned on the ordinary shareholders’ (owners’) investment in the company. For a company that
uses only ordinary shares to finance its operations, the ROE and ROA figures will be identical. With
debt or preferred shares on the balance sheet, these ratios will usually differ. When the company earns a
profit, even after making interest payments to creditors and paying dividends to preferred shareholders,7 We state per-share values strictly in dollars and cents, as do company reports.operating profit margin
A measure of profitability that
represents the percentage of
each sales dollar remaining
after deducting all costs and
expenses other than interest
and taxes
net profit margin
A measure of profitability that
represents the percentage of
each sales dollar remaining
after all costs and expenses,
including interest, taxes, and
preferred share dividends,
have been deducted
return on total assets
(ROA)
A measure of the overall
effectiveness of management
in generating returns to
ordinary shareholders with its
available assets
return on ordinary equity
(ROE)
A measure that captures the
return earned on the ordinary
shareholders’ (owners’)
investment in a companyFrank Popoff, Chairman of
the Board (retired), Dow
Chemical
‘Overstating or
understating the
performance of the
enterprise is anathema
... it’s just not on.’
See the entire interview on
the CourseMate website.COurSEMATE
SMArT VIDEO
Source: Cengage Learning