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5. Analyals of Financial statementsi Profitability Ratios Profitability, ratios refinct the net result of all the firm's polkies and operating decisiens. The profitabity ratios include the: (1) Operating margin, (2) Profit margin, (3) Return on total assets (ROA), (4) Basic earning power (BEP), (5) Return on imested capital (ROAC), and (6) Return on comman equity (ROE). The operating margin indicates what percentage of sales remain after are accounted for it is a measure of the firm's operating effoency. Its equation as: Operatingmargin=SalesEBHT The prote margin indicates what percentage of sales profitability. Its equation is: represents. It mesweses the firm's combined impact of eperating efficiency and on the firm's Proftmargin=SalesNetincome The return on total assets (ROA) measures the retum on all the firmb ablets intereat and taxes. Its equation is: Returncontotalasseta(ROA)=TotalasethNetincome A low ROa can resch from a firm's decision te use more debt because high interest evpenues wil cause net inceme to eaming power of the firm's assets taxes and dett and is uset, for comparing ferms with cifferent debe rabos and tax rates. Its equation is: Basiceamingpower(BEP)=TotalastetsEDIT Profit margin =Salesivetuncoune The return co total assets (ROA) measures the recum on all the firm's assets interest and taxes, Its equation is: Return on total assets (ROA)=TotalassetsNetincome A low ROA can result from a firm's dectsion to use more debt because high interest expenses will cause net income to earning power of the firm's assets taxes and debe and is useful for comparing firms with different debt natios and tax rates. Basicearningpower(BEP)=TotalassetsEBIT The return on invested capital (ROIC) shows the after-tax operating return on total ifvested capica, which is equal to the sum of debt and equity (assuming no preferred stock is issued), Its equation is: Returnoninvestedcapital(ROIC)=TotalinvestedcapitalEBTT(1T) The return on common equity (ROE) measures the retum on investment. Its equation is: Fetumoncacumonequity(ROB)=CotnmonequityNetlitcome

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