• All the ratios should be compared with the competitors to access the performance of the company on that industry sector level & also as a temporal trend.

Profitability

EBITDA Margin (Operating Profit Margin)

• Earnings before Interest Tax Depreciation & Amortization. EBITDA Margin tells us how profitable (in percentage terms) the company is at an operating level.
• EBITDA = Operating Revenue - Operating Expense
  • Operating Revenues = Total Revenue – Other Income
  • Operating Expense = Total Expense – Finance Cost – Depreciation & Amortization
• EBIDTA Margin (CAGR) = EBITDA / [Total Revenue – Other Income]
• Higher the better.

PAT Margin

• Profit After Tax (PAT) margin is calculated at the final profitability level.
• PAT Margin = PAT / Total Revenues
• Higher the better.

Return on Equity (RoE)

• RoE measures the entity’s ability to generate profits from the shareholders investments.
• RoE = Net Profit / Shareholders Equity 100*
• A high RoE is great, but certainly not at the cost of high debt.

Du Pont Model

• Du pont model gives better understanding of the ROE

  

  • Net Profit Margin = (Net Profits / Net Sales) conveys companies profitability (PAT margin). Higher the better.
  • Asset Turnover = (Net Sales / Avg. Total Asset) Efficiency of company in utilizing it's assets. Higher the better.
    • Avg total asset = (assets in previous year + assets in this year) / 2
  • Financial Leverage = (Avg. Total Assets / Shareholder Equity). For every unit of shareholder equity, how much assets are leveraged.
    • Lower the better.
    • Higher the financial leverage along with increased amounts of debt, will indicate the company is highly leveraged and hence the investor should exercise caution.

Return on Asset (RoA)

• Effectiveness of the entity’s ability to use the assets to create profits.
• RoA = [Net income + interest(1-tax rate)] / Total Average Assets*
  • Net Income is current year profits.
  • Tax Rate ~ 32% avg.
  • Interest is the Finance Cost.