19.2.3. Profitability Ratios

Try these first

1. 1.

   What is the formula for the Gross Profit Ratio?

   Hint

   Think about what cost is deducted from sales to find profit.

2. 2.

   What does ROE stand for?

   Hint

   Consider whose equity we are examining in the context of earnings.

3. 3.

   What does the Gross Profit Ratio measure?

   • Operational efficiency
   • Net sales performance
   • Profitability relative to equity

   Hint

   Remember the focus on costs related to production.

4. 4.

   True or False: A high Net Profit Ratio always indicates a successful company.

   • True
   • False

   Hint

   Consider what 'high' means in different contexts.

5. 5.

   A startup generated $1,200,000 in sales, spent$600,000 on goods, and $300,000 on expenses. Calculate the Gross Profit Ratio and the Net Profit Ratio. Discuss what these ratios reveal about the startup's financial performance.

   Hint

   Keep the focus on how expenses affect net profitability and the balance between sales and costs.

6. 6.

   A tech corporation has a Net Income of $2,500,000 and Shareholders’ Equity of$10,000,000. Analyze its ROE compared to an industry average of 15%. What does this mean for investors?

   Hint

   Think about investor confidence and what high ROE indicates in terms of value creation.