Cheat Sheet: Profit & Return Ratios

Ratios to evaluate operating profitability and returns on invested capital.

Income Statement Ratios Calculation Healthy

Ratios that measure a business's profitability.

Gross Margin Gross Profit / Revenue > 50%

EBITDA Margin Earnings before Interest, Taxes, Depreciation & Amortization / Revenue > 25%
EBIT Margin Earnings before Interest & Taxes / Revenue > 20%
Net Profit Margin Net Profit / Revenue > 15%
Effective Interest Rate Interest Expense / Total Debt < 6%
Effective Tax Rate Provision for Taxes / Profit Before Tax < 35%
EBITDA - CAPEX Margin (EBITDA - CapEx) / Revenue > 15%

Return On Capital Ratios Calculation Healthy

Ratios that measure a business's return on book value of invested capital.

Return on Equity Net Profit / Average Common Equity > 15%

Return on Invested Capital * EBIT * (1 - 39%) / Average Total Equity + Total Debt > 10%
Return on Assets Net Profit / Average Total Assets > 10%
Unlevered Return on Assets Earnings before Interest & Taxes / Average Total Assets > 15%

Market Data Ratios Calculation Healthy

Ratios that measure a business's yield on the market value of invested capital.

Dividend Yield Dividend Per Share / Stock Price > 1%

FCF Yield Levered Free Cash Flow / Market Cap > 5%
Earnings Yield Earnings Per Share / Stock Price or Net Profit / Market Cap > 5%
EBIT Yield Earnings before Interest & Taxes / Enterprise Value > 5%

Supporting Calculations Calculation Healthy

Levered Free Cash Flow Cash from Operations + Cash from Investing >0

* ROIC calculation assumes a 23% corporate tax rate

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