tag:thefinancialtrainingacademyltd.blog.co.uk,2009-11-09:/MokoFeed2009-11-09T04:32:09+01:00tag:thefinancialtrainingacademyltd.blog.co.uk,2007-06-25:/2007/06/25/the_financial_training_academy_ltd~2514160/thefinancialtrainingacademyltd2007-06-25T08:05:00+02:002007-06-25T08:05:00+02:00 <p> Two other </p> <p>ratios we can<br> use to measure profitability are Operating Income to Sales and Return on Assets.<br> Operating Income to Sales<br> Operating Income to Sales compares Earnings Before Interest and Taxes (EBIT) to </p> <p>Sales.<br> By using EBIT, we place more emphasis on operating results and we more closely </p> <p>follow<br> cash flow concepts. Operating Income to Sales is calculated as follows:<br> EBIT / Net Sales<br> Chapter 4<br> 8<br> EXAMPLE — Net Sales are $ 460,000 and Earnings Before Interest and<br> Taxes is $ 100,000. This gives us a return of 22% on sales, $ 100,000 / $<br> 460,000 = .22. For every $ 1.00 of sales, we generated $ .22 in Operating<br> Income.<br> Return on Assets<br> Return on Assets measures the net income returned on each dollar of assets. This </p> <p>ratio<br> measures overall profitability from our R in assets. Higher rates of return are<br> desirable. Return on Assets is calculated as follows:<br> Net Income / Average Total Assets<br> EXAMPLE — Net Income is $ 60,000 and average total assets for the year<br> are $ 500,000. This gives us a 12% return on assets, $ 60,000 / $ 500.000<br> = .12.<br> Return on Assets is often modified to ensure accurate measurement of returns. For </p> <p>example,<br> we may want to deduct out preferred dividends from Net Income or maybe we should </p> <p>include<br> operating assets only and exclude intangibles, investments, and other assets not </p> <p>managed<br> for an overall rate of return.<br> Leverage Ratios<br> Another important group of detail ratios are Leverage Ratios. Leverage Ratios </p> <p>measure the<br> use of debt and equity for financing of assets. We previously looked at the </p> <p>Financial<br> Leverage Ratio as part of Return on Equity. Three other leverage ratios that we </p> <p>can use are<br> Debt to Equity, Debt Ratio, and Times Interest Earned.<br> Debt to Equity<br> Debt to Equity is the ratio of Total Debt to Total Equity. It compares the funds </p> <p>provided by<br> creditors to the funds provided by shareholders. As more debt is used, the Debt </p> <p>to Equity<br> Ratio will increase. Since we incur more fixed interest obligations with debt, </p> <p>risk increases.<br> On the other hand, the use of debt can help improve earnings since we get to </p> <p>deduct interest<br> expense on the tax return. 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