MODULE X – PROFITABILITY ANALYSES

When a company is incepted, one of the sole purposes of it is to make profits. Basically, to earn
more than you spend is what every business owner wants for his company. Thus, to assess the
growth of your business, careful study on profit is important, and that is pretty obvious.
However, the nuances that secretly lie under various financial statements, will give you the real
picture of your company’s profits.

Analyzing of the profits which is basically the money remaining from the capital after subtracting
all the operation, administrative and overhead costs, will help you keep a track of your business’
performance. Profitability analysis allows companies to maximize their profit thus, resulting in
maximizing the opportunities that a business can take advantage of, in order to continue
growing in an extremely dynamic, competitive, and vibrant market. Profitability analysis helps
businesses identify growth opportunities, fast/slow-moving stock items, market trends, etc.,
ultimately helping decision-makers see a more concrete picture of the company as a whole.

Profitability ratios

Accountants use these ratios to measure a business's earnings versus its expenses. These are
some common profitability ratios: 

 Return on Assets = Net Income/Average Total Assets: The return on assets ratio

indicates how much profit businesses make compared to their assets. 

 Return on Equity = Net Income/Average Stockholder Equity: This ratio shows your

business's profitability from your stockholders' investments. 

 Profit Margin = Net Income/Sales: The profit margin is an easy way to tell how much of
your income comes from sales. 

 Earnings Per Share = Net Income/Number of Common Shares Outstanding: The

earnings-per-share ratio is similar to the return-on-equity ratio, except that this ratio
indicates your profitability from the outstanding shares at the end of a given period.

Leverage ratios

A leverage ratio is a good way to easily see how much of your company's capital comes from
debt and how likely it is that your company can meet its financial obligations. Leverage ratios
are similar to liquidity ratios, except that leverage ratios consider your totals, whereas liquidity
ratios focus on your current assets and liabilities. 

 Debt-to-Equity Ratio = Total Debt/Total Equity: This ratio measures your company's

leverage by comparing your liabilities, or debts, to your value as represented by your
stockholders' equity. 

 Total Debt Ratio = (Total Assets - Total Equity)/Total Assets: Your total debt ratio is
a quick way to see how much of your assets are available because of debt. 
  Long-Term Debt Ratio = Long-Term Debt/(Long-Term Debt + Total Equity): Similar
to the total debt ratio, this formula lets you see your assets available because of debt for
longer than a one-year period.

Turnover ratios

Turnover ratios are used to measure your company's income against its assets. There are many
different types of turnover ratios. Here are some common turnover ratios:  

 Inventory Turnover Ratio = Costs of Goods Sold/Average Inventories: The

inventory turnover rate shows how much inventory you've sold in a year or other
specified period. 

 Assets Turnover Ratio = Sales/Average Total Assets: This ratio is a good indicator of
how good your company is at using your assets to produce revenue. 

 Accounts Receivable Turnover Ratio = Sales/Average Accounts Receivable: You

can use this ratio to evaluate how quickly your company is able to collect funds from its
customers. 

 Accounts Payable Turnover Ratio = Total Supplier Purchases/(Beginning

Accounts Payable + Ending Accounts Payable)/2): This ratio measures the speed at
which a company pays its suppliers.

Market value ratios

Market value ratios deal entirely with stocks and shares. Many investors use these ratios to
determine if your stocks are overpriced or underpriced. These are a couple of common market
value ratios: 

 Price-to-Earnings Ratio = Price Per Share/Earnings Per Share. Investors use the
price-to-earnings ratio to see how much they're paying for each dollar earned per stock.

 Market-to-Book Ratio = Market Value Per Share/Book Value P

Other analyses

The payback period refers to the amount of time it takes to recover the cost of an
investment. Simply put, the payback period is the length of time an investment reaches a
break-even point.

The desirability of an investment is directly related to its payback period. Shorter

paybacks mean more attractive investments.

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of

an investment or compare the efficiency of a number of different investments. ROI tries
to directly measure the amount of return on a particular investment, relative to the
investment’s cost.
 **ROI = (Ending value of investment – Beginning value of investments) / Beginning value
of investments

**Payback Period (in Years)

Break-Even Point (BEP) = to calculate the break-even point in units/sales in pesos, use the
formula:

**Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
**Break-Even point (sales pesos) = Fixed Costs ÷ Contribution Margin.

MODULE X – APPENDICES/INDICES

This section of the study stipulates the various tables and assumptions in every module. Every
table presented corresponds to the values given in the financial analysis. It is recommended
that corresponding page of any table is also reflected in a separate column in the financial
statements so as to immediately find its reference page for easier verification. The specialized
column can be tagged as “folio”.

Example: