Ratio

Calculation

Discussion

Gross Margin

(Sales – COGS) / Sales

This captures the relationship between sales and manufacturing (or merchandising) costs.  (Also, called the gross profit margin.)

Return on Sales

Net Income / Sales

Measures the relationship of the bottom line to sales and thus captures sales to total costs of sales.  (Also called the net profit margin).

Return on Assets

Net Income / Average Total Assets

Measures the firm’s efficiency in using assets to generate earnings.  Alternatively stated, it captures earnings to all providers of capital

Pretax Return on Assets

Earnings Before Interest & Taxes / Average Total Assets

Measures earnings from operations on a pretax and pre-interest expense basis.

Return on Total Equity

Net Income / Average Total Stockholders’ Equity

Measures earnings to owners as measured by net assets.

Dividend Payout

Common Dividends / Net Income

Measures the percent of earnings paid out to common stockholders.

Operating Profit Margin

Income From Continuing Operations (After Tax) / Sales

Pretax Profit Margin

Income Before Tax / Sales

Return on Common Equity

(Net Income – Preferred Dividends) / Average Common Equity

Financial Leverage Index

Return on Equity / Return on Assets