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Ratio Analysis Memo Profitability: Asset turnover and Profit Margin What do the profitability ratios reveal about the financial position of the company? Which users may be interested in each type of ratio? What does the collected data reveal about the performance and position of the company? The profitability ratios measure a company’s operating success for a specific period of time. Most investors and bankers are going to be interested in the profitability of a company.
The data for asset turnover indicates how much profit a company is making based on the usage of the available assets. The data for the profit margin indicates how much of the company’s sales resulted in net income for the business. Asset Turnover Asset turnover: This shows how efficiently a company uses its assets to generate sales. The formula to determine asset turnover is: net sales/average assets 2007-2008: 2008 net sales = $1,298,498. 41 2007 total assets = $1,498,882. 00 2008 total assets = $1,932,041. 17 2007/2008 average assets: $1,498,882. 0 + $1,932,041. 17 / 2 = $1,715,461. 59 2008 asset turnover: $1,298,498. 41 / $1,715,461. 59 = 0. 76 This indicates that each dollar invested in assets produced $0. 76 in sales. 2006-2007: 2007 net sales = $1,560,934. 93 2006 total assets = $543,202. 51 2007 total assets = $1,498,882. 00 2006/2007 average assets: $543,202. 51 + $1,498,882. 00/ 2 = $1,021,042. 26 2007 asset turnover: $1,560,934. 93 / $1,021,042. 26 = $1. 53 This indicates that each dollar invested in assets produced $1. 53 in sales. Profit Margin
Profit Margin: Shows the percentage of sales that result in net income. The formula that is used to determine the profit margin is: net income/net sales 2008 2008 net sales = $1,298,498. 41 2008 net income = $493,139. 75 2008 profit margin: $493,139. 75 / $1,298,498. 41 = 0. 379 or 38% This indicates that 38% of sales resulted in net income for 2008. 2007 2007 net sales = $1,560,934. 93 2007 net income = $769,000. 80 2007 profit margin: $769,000. 80 / $1,560,934. 93 = 0. 493 or 49% This indicates that 49% of sales resulted in net income for 2007.