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Return on Sales Formula - PowerPoint - PowerPoint


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									Capsim Success Measures
RETURN    Formula           Return on equity (ROE) is net profit
ON           Description:     divided by total equity.
          What Does Return Return on equity tells you how
            On Equity Tell   effectively a company is using the
            You?             dollars invested in it by

                            ROE is the most often quoted single
                              statistic when describing a firm's
                              performance. It is also one of the
                              statistics considered to be most
                              useful by stockholders.
RETURN    Formula            You determine return on assets by dividing
ON           Description:       net profit by your total asset base.

          What Does Return   Return on assets is an efficiency ratio. It
            On Assets Tell      compares the profits generated with the
            You?                asset base required. It answers the
                                question, how hard are you working
                                your assets?

                             There is an economic opportunity cost
                                notion associated with this ratio. An
                                operating manager may be challenged
                                with how a dollar spent on assets might
                                do compared with a dollar invested in
                                some other area (e.g., a bank account),
                                or how the ROA compares with the
                                interest a firm is paying on the money
                                borrowed to pay for the asset.
RETURN    Formula            You determine return on sales by dividing
ON           Description:       net profit by net sales.
SALES     What Does Return   Since return on sales (ROS) gives the
  (ROS)     On Sales Tell       analyst an idea of the profit margin on a
            You?                product, this ratio can reveal a great
                                deal about product positioning and
                                pricing policies. For example, a high
                                ROS suggests premium pricing. This
                                suggests the product will not be aimed
                                at a commodity market. ROS is also a
                                good indicator of demand and supply
                                within the industry. The more
                                competitive an industry, the more
                                pressure there is on price and
                                subsequently ROS falls. For example,
                                the ROS of the airline industry has
                                been low due to intense competition in
                                the last few years.
ASSET     Formula           Asset turnover is derived by dividing period
TURN         Description:      sales by average total assets.
OVER      What Does Asset   Asset turnover tells an analyst more about
  (T/O)     Turnover Tell      volume of sales than it does about
            You?               profitability (the numerator is a top line
                               number on the income statement, not a
                               bottom line number).

                            Asset turnover (T/O) demonstrates how
                              effective the asset base is in generating
                              top line revenue. High T/O values have
                              implications in terms of plant structure,
                              level of backward integration, and
                              aggressiveness of pricing policy.
CUM-      Formula          Cumulative Profits is the total of
ULATIVE     Description:     all year's Net Profit.

          What Does        How Profitable the company
           Cumulative        has been over time
           Profits Tell
MARKET   Formula            Percentage share of industry sales
SHARE       Description:      dollars.
         What Does Market What portion of total industry sales a
           Share in         company has captured.
           Dollars Tell
STOCK   Formula          Stock Price is a function of book
PRICE     Description:     value, EPS, and average

        What Does        This is an indication of the value
         Stock Price       independent investors believe
         Tell You?         you shares possess.
MARKET   Formula            Market Capitalization is calculated by
  CAP       Description:      determining the weighted average
                              number of shares for a given period
                              and then multiplying that number by the
                              closing Stock Price.
         What Does Market   The recognition that Market Cap is a
           Cap Tell You?       function of both share price and share
                               volume is significant for this number
                               tells you more about the real value of
                               the company than just the share price
                               alone. In the extreme a corporation
                               could be trading at a huge P/E multiple
                               but if it only had relatively few shares
                               outstanding then the company would
                               not be worth as much as a company
                               that was trading at a relatively poor
                               multiple but had a large number of
                               shares outstanding.
                            Market Cap is the truest indication of the
                               markets estimate of a company's worth.

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