NET PROFIT MARGIN

PAT Margin = Profit After Tax / Total Revenueif

Eg: If 5% is the PAT margin the remaining 95% went into expenses.

• Compare PAT and PAT Margin to other previous numbers and also other companies

EBITDA
• Earnings before Interest Tax Depreciation & Amortization.

Indicates the operational efficiency of the company's working model

• EBITDA Margin tells us how profitable the company is at an operating level (in %
terms)

• EBITDA Margin = EBITDA / Operating Revenue

Return on Equity(RoE)
Helps us assess the return the shareholder earns for every unit of capital invested

• Measures the company's ability and efficiency to generate profits from the shareholder's investments

But ROE has a small problem...

• If Jignesh gives Rs 1 lakh to his supermarket,ROE = Profit/Equity = 10,000/1 lakh = 10%

• But if Jignesh gave Rs 50,000 and the remaining Rs 50,000 was debt

RoE = Profit/Equity = 10,000/50,000 = 20%With additional debt, RoE doubled.

High RoE is great but not if there is high debt. High debt results in higher interest payments.

Return on Capital Employed (RoCE)

Indicates the company's profitability by taking into consideration the overall capital it employs.
Never use either RoE or RoCE alone, always use them together

•If ROCE> ROE, there is higher chance of little or(no) debt on its books

• If RoE > ROCE, we can assume the company is highly leveraged

• High leverage is good only if company is able to generate better profits with it

• If Profit growth is higher than interest expenses, then it is good

• If RoE is higher and PAT is low, then investors must be cautious of high

debtWarren Buffett's Philosophy: Both RoE and ROCE should be above 20%. The closer they are together
the better, and large divergences between RoE and ROCE are not ideal.

Return on Asset(RA)

Evaluates the effectiveness of the company's ability to use its assets to create profits.
• RoA indicates the management's efficiency at deploying its assets.
• RoA = Net income / Total Avg Assets
Interest Coverage Ratio
Helps us understand how much the company is earning relative to the interest burden of the company

Interpretation can be how easily a company can pay its interest payments