Overview:
An income statement is a statement that records all kinds of revenues and expenses that occurred in the entity for a specific period of time.
This statement is sometimes called a statement of financial performance since it shows how good or bad an entity’s performance is compared to other periods or entities.
There are many types of financial ratios that most of the finance profession, shareholders, and investors use to analyst the entity’s income statement as we as its financial performance.
The following are the list of 7 income statement’s ratios that mostly use:
1) Gross Profit Margin:
Gross profit margin is one of the profitability ratios that use to measure how profitable the entity is after deducting the cost of goods sold from total revenues.
The two main important items in this ratio are total revenue and cost of goods sold. Gross profit margin normally low when the cost of goods sold is high and it happens to the types of products or services that have high competition in the markets.
However, the low-profit margin might also because of poor cost controlling or production functions.
This ratio is calculated by dividing gross profit with net sales total sales revenue for the period. Gross profit results from deducting the cost of goods sold from total sales revenues.
The high ratio compares to the previous period or competitor means the entity products or services are highly profitable. The low ratio might be because of high competition, poor cost controlling, and poor production process.
2) Operating Profit Margin:
It is different from gross profit since gross profits are before operating expenses. For example, if you have a total sales revenue amount of 5,000 USD and the cost of goods sold amount to 3,000 USD.
Operating profit margin measures the profitability of the entity by comparing the operating profit over net sales that the entity generates during the period. Operating profit could be founded in the income statement and they are the profits before interest and tax expenses.
The gross profit is 2,000 USD. , for example, the operating expenses amount to 1,000 USD. The operating profit is 1,000 USD.
Operating profit margin would be 20% 1,000/,5000
The main objective of assessing the operating profit because they want to assess what is the profit after deducting operating expenses compare to the previous period or competitor.
Normally, the result is better, which could mean that the entity has managed its operating expenses very well.
3) Net Profit Margin:
Net profit margin by the ways compares and assesses the entity profitability at the bottom line which is the amount that contributes to shareholders. The calculation of net profit margin is by dividing net profit by total sales revenues.
In the income statement, net profit stays at the bottom line and it is the result of deducting the cost of goods sold, operating expenses, tax expenses, and interest expenses during the period from total sales revenues.
It is important for income statement ratios to be considered when we performance financial statements analysis.
4) Earnings Per Share:
Earning per share is the proportion of the entity’s earning over the outstanding common shares. This ratio measures the entity’s profitability especially comparing one investment company to another.
Even this ratio is very important especially from an investor’s point of view, most experts concern that there are risks of manipulation done by executive management to ensure that the ratio looks nice.
The calculation of this ratio is the net income for the period less the amount that paid for preferred share and then divides with averages outstanding shares.
5) Price-earnings Ratio:
Price earning per share or PE ratio measure the current share price of the entity over the current earning per share. This ratio is very important for the entity to ensure that the current share price or further share price is not going down.
The reason is most of the investor they look at the PE ratio and assess the further dividend that they should be paid and how much now they should offer to share price.
The calculation of price earning per share is by taking the market value per share of entity divided by earning per share.
6) Times Interest Earned:
Time interest earned measures how the entity profit before interest and tax could cover its interest expenses for the period.
The calculation of this ratio is sometimes used profit before interest and tax and sometimes use profit before interest and tax and amortization.
This is not the profitability ratio, it is the liquidity ratio since this ratio does not measure how profitable the entity is, but it measures whether or not the entity could pay its interest expenses.
The calculation of this ratio is sometimes used profit before interest and tax and sometimes use profit before interest and tax and amortization.
This is not the profitability ratio, it is the liquidity ratio since this ratio does not measure how profitable the entity is, but it measures whether or not the entity could pay its interest expenses.
7) Return on Stockholders’ Equity:
This is the same as return on equity, return on shareholders equity measures how much the entity could generate the income and payback to the equity fund that invested by its owners.
Return on equity is the profitability ratio since it measures the entity’s profitability. The two main important functions that involve in this ratio are net income and stockholders’ equity.
It is one of the most important income statement ratios that use by stock analysis.
