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497 Case Analysis Financial Ratio Analysis 2016.pdf

497 Case Analysis Financial Ratio Analysis 2016.pdf - MGMT...

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MGMT 497 Some Notes on Financial Ratio Analysis Profitability Ratios (1) Gross Profit Margin (GPM) = % 100 Revenues Total Sales of Cost Revenues Total × The gross margin indicates how much of every dollar of sales is left after paying out the costs of goods sold. The margin reflects the company’s pricing, cost structure and production efficiency. A healthy gross margin is important for keeping cash flow strong. This financial ratio is not available for some companies like banks and insurance companies. (2) Operating Profit Margin (OPM) = % 100 Revenues Total Income Operating × Operating income (or operating profit), which equals gross profit minus operating expenses, tells us show how much income a company can generate from its own operations. It does not include income from investments in other businesses. Operating profit margin indicates how effective a company is at controlling the costs and expenses associated with their normal business operations. It shows how much a company makes (before interest and taxes) on each dollar of sales. A high operating margin gives management more flexibility in determining prices. (3) Net Profit Margin (NPM) = % 100 Revenues Total Income Net ×
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