ROE

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity.
Return on equity measures a corporation's profitability by revealing how much profit a company generates
with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends
to preferred stock.) Shareholder's equity does not include preferred shares.

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by
subtracting preferred dividends from net income and subtracting preferred equity from shareholders'
equity, giving the following: return on common equity (ROCE) = net income - preferred dividends
/ common equity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity.
Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period
to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity
figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-
of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating
both beginning and ending ROEs allows an investor to determine the change in profitability over the
period.

Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found
on the balance sheet. The DuPont formula is a common way to break down ROE into three important components.
Essentially, ROE will equal the net margin multiplied by asset turnover multiplied by financial leverage.It is defined as
Income available to Common Shareholders (excl Extra ordinaries) divided by the Average Book Value over the period.

Widely used by investors, the ROE ratio shows the return being generated for every pound of equity on the balance sheet. It

should be thought of as the 'internal return' that the company generates, and should not be mistaken with the market returns

that shareholders may attain. It varies by industry but ROEs of 15% or over are usually considered desirable. High ROE

numbers sustained over the long term may indicate a company has a 'sustainable competitive advantage'. Such companies

tend to sell at higher valuation multiples.

The impact of leverage is one of the disadvantages of focusing on ROEs as it can skew ROE upwards - an alternative is to

look at Return on Capital Employed.

NPR
Net profit margin is the ratio of net profits to revenues for a company or business segment . Typically expressed as a
percentage, net profit margins show how much of each dollar collected by a company as revenue translates into
profit. The equation to calculate net profit margin is: net margin = net profit / revenue.

Net profit margin is one of the most important indicators of a business's financial health. It can give a more accurate
view of how profitable a business is than its cash flow, and by tracking increases and decreases in its net profit
margin, a business can assess whether or not current practices are working. Additionally, because net profit margin is
expressed as a percentage rather than a dollar amount, as net profit is, it makes it possible to compare the
profitability of two or more businesses regardless of their differences in size. Finally, a business can use its net profit
margin to forecast profits based on revenues.

Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The
measurement reveals the amount of profit that a business can extract from its total sales. The net sales part of the
equation is gross sales minus all sales deductions, such as sales allowances.

This measurement is typically made for a standard reporting period, such as a month, quarter, or year. The net profit

margin is intended to be a measure of the overall success of a business. A high net profit margin indicates that a

business is pricing its products correctly and is exercising good cost control. It is useful for comparing the results of

businesses within the same industry, since they are all subject to the same business environment and customer base,

and may have approximately the same cost structures. Generally, a net profit margin in excess of 10% is considered

excellent, though it depends on the industry and the structure of the business. When used in concert with the gross

profit margin, you can analyze the amount of total expenses associated with selling, general, and administrative

expenses (which are located on the income statement between the gross margin and the net profit line items).

The net profit margin, also known as net margin, indicates how much net income a company makes with total
sales achieved. A higher net profit margin means that a company is more efficient at converting sales into actual
profit. Net profit margin analysis is not the same as gross profit margin. Under gross profit, fixed costs are excluded
from calculation. With net profit margin ratio all costs are included to find the final benefit of the income of a
business. Similar terms used to describe net profit margins include net margin, net profit, net profit ratio, net profit
margin percentage, and more. To calculate net profit margin and provide net profit margin ratio analysis requires
skills ranging from those of a small business owner to an experienced CFO. As a result, this depends on the size and
complexity of the company.

Net margin measures how successful a company has been at the business of marking a profit on each dollar sales.
It is one of the most essential financial ratios. Net margin includes all the factors that influence profitability
whether under management control or not. The higher the ratio, the more effective a company is at cost control.
Compared with industry average, it tells investors how well the management and operations of a company are
performing against its competitors. Compared with different industries, it tells investors which industries are
relatively more profitable than others. Net profit margin analysis is also used among many common methods
for business valuation.
Easily discover if your company has a pricing problem. As you analyze your net profit margin, it’s an opportune
time to take a look at you pricing. Download the free Pricing for Profit Inspection Guide to learn how to price
profitably.

Sales are important to any company, but tracking sales revenue alone does not give a company clear insight into how

they are doing financially. In order to determine their profit, companies must deduct expenses, bills and overhead

from the sales revenue. The amount that remains is the company's net profit margin, and is a good indicator of their

profitability and market viability.

Net profit margin, sometimes called net margin, shows directly the amount of a company's net income in relation to

the total sales earned. This ratio helps a company determine how much actual profit is made from each sale earned.

The higher the net profit margin, the better the company is doing at turning sales into profit. Strong sales will increase

the net profit margin; however, decreasing costs and overhead also help turn those sales into profit.

Applications of the Net Profit Margin

The net profit margin allows companies to determine how well they are doing in relation to other industries and

competing companies; therefore, it is an integral part of business management. The higher the net margin ratio, the

better the company is at managing costs and turning sales into profit. Investors and shareholders rely on the net profit

margin to evaluate the worth of a company, and this affects the corporation's stock and overall image in the business

world as well.

QR
The quick ratio is a measure of how well a company can meet its short-term financial liabilities. Also known as

the acid-test ratio

The quick ratio is a more conservative version of another well-known liquidity metric -- the current ratio. Although the
two are similar, the quick ratio provides a more rigorous assessment of a company's ability to pay its current liabilities.
It does this by eliminating all but the most liquid of current assets from consideration. Inventory is the most notable
exclusion, because it is not as rapidly convertible to cash and is often sold on credit.
Some analysts include inventory in the ratio, though, if it is more liquid than certain receivables.

The quick ratio is an indicator of a company’s short-term liquidity, and measures a company’s ability to meet its short-
term obligations with its most liquid assets. Because we're only concerned with the most liquid assets, the ratio
excludes inventories from current assets.

While a quick ratio lower than 1 does not necessarily mean the company is going into default or bankruptcy, it could
mean that the company is relying heavily on inventory or other assets to pay its short term liabilities. The higher the
quick ratio, the better the company's liquidity position. However, too high a quick ratio may indicate that the company
has too much cash sitting in its reserves. It may also mean that the company has a high accounts receivables,
indicating that the company may be having problems collecting on its account receivables.

Whether accounts receivable is a source of quick ready cash is debatable, however, and depends on the credit terms
that the company extends to its customers. A firm that gives its customers only 30 days to pay will obviously be in a
better liquidity position than one that gives them 90 days. But the liquidity position also depends on the credit terms
the company has negotiated from its suppliers. For example, if a firm gives its customers 90 days to pay, but has 120
days to pay its suppliers, its liquidity position may be reasonable.
 Problem Solving Template

This problem solving template can be utilized in answering the milestone/output. You will be appropriately prompted to use this template. A
sample problem has been included in the next page for your reference.
Clothes
PROBLEM:

If the company financially stable

Step 1 : Identify the Objective of the problem.

Find the 3 ratio of the clothes

Step 2 : Identify the given of the problem.

Product Sales Expenses Assets Investment Liabilities Net Income

Clothes 7,500,000 6,000,000 18,000,000 30,000,000 12,800,000 1,500,000

Bags 6,800,000 5,200,000 17,500,000 25,000,000 15,000,000 1,600,000

Step 3 : Provide a detailed solution and the logic behind each step.

ROE= Profit (net income) ROE= 1,500,000____

Assets- Liabilities 18,000,000 - 12,800,000 = 0.29/29%

divide 1,500,000 (profit) to the answer of assets and the liabilities first minus the 18,000,000(assets) and the 12,800,000 (liabilities) to get
the answer 0.29/29%
NPR= Profit NPR= 1,500,000__ = 0.2
Sales 7,500,000
Divide the 1,500,000(profit) to the 7,500,000(sales) to get the answer 0.2
QR=Assets + Investment QR= 18,000,000 +_30,000,000 = 3.75
Liabilities 12,800,000
Add the 18,000,000(assets) and the 30,000,000(investment) and then divide the 12,800,000(liabilities) to get the answer 3.75

Step 4 : Provide your final answer. Give a short 1-2 sentence answer explaining what the answer means.

The return on equity of clothes is 0.29 and the net profit ratio of clothes is 0.2
and the quick ratio of clothes is 3.75 that we able to Identify if the product have ability to sustain the company.

Bags

PROBLEM:

If the company is financially stable

Step 1 : Identify the Objective of the problem.

Find the 3 ratio of the bags

Step 2 : Identify the given of the problem.

Product Sales Expenses Assets Investment Liabilities Net Income

Clothes 7,500,000 6,000,000 18,000,000 30,000,000 12,800,000 1,500,000

Bags 6,800,000 5,200,000 17,500,000 25,000,000 15,000,000 1,600,000

Step 3 : Provide a detailed solution and the logic behind each step.
ROE= Profit (net income) ROE= 1,600,000
Assets- Liabilities 17,500,00 - 15,000,000 = 0.64/64%
divide 1,600,000 (profit) to the answer of assets and the liabilities first minus the 17,500,000(assets) and the 15,000,000 (liabilities) to get
the answer 0.64/64%
NPR= Profit NPR= 1,600,000 = 0.24
Sales 6,800,000
Divide the 1,600,000(profit) to the 6,800,000(sales) to get the answer = 0.24

QR=Assets + Investment QR=17,500,000 + 25,000,000 =2.83

Liabilities 15,000,000

Add the 17,500,000(assets) +25,000,000(investments) then divide the answer of that to the 15,000,000(liabilities) to get the answer of 2.83

Step 4 : Provide your final answer. Give a short 1-2 sentence answer explaining what the answer means.

The return on equity of bags is 0.64 and the net profit ratio of bags is 0.24 and
the quick ratio of bags is 2.83 that we able to Identify if the product have ability to sustain the company.

(Question No. 2)
Clothes
PROBLEM:

If the company financially stable

Step 1 : Identify the Objective of the problem.

Explain how each of the three (3) ratios of clothes contributes to understanding the company.

Step 2 : Identify the given of the problem.

NPR - 0.2
QR - 3.75

Step 3 : Provide a detailed solution and the logic behind each step.

A. No, Mariano Corporation is not enough the money that can’t cover the current liabilities because the QR is 3.75 it is Greater than
1 so they can cover the current liabilities.
B. Yes, the Mariano Corporation is not making enough of the money because the company is new and growing so the NPR of the
Clothes is 20% so that they can get the 20 cent in every peso to the investor
C. Yes, because the ROE of the clothes is 0.64 so that the company stable from the Financial Perspective

Step 4 : Provide your final answer. Give a short 1-2 sentence answer explaining what the answer means.

The QR of the clothes is 3.75 they can pay for the current liabilities and the NPR of the clothes is 20% so the company stable for the financial
perspective

Bags

PROBLEM:

If the company financially stable

Step 1 : Identify the Objective of the problem.

Explain how each of the three (3) ratios of bags contributes to understanding the company.

Step 2 : Identify the given of the problem.

NPR = 0.24
QR =2.83

Step 3 : Provide a detailed solution and the logic behind each step.

A. No, Mariano Corporation is not enough the money that can’t cover the current liabilities, because the QR of the bags is 2.83 is
greater than 1 so that they can cover the current liabilities.
B. Yes,the Mariano Corporation is not making enough of the money because the company is new and growing. So the NPR of the
bag is 0.24 so that they can get the the 20 cents in every peso to the investor.
C. Yes, because the ROE of bags is 2.83 so that the company stable for the financial perspective

Step 4 : Provide your final answer. Give a short 1-2 sentence answer explaining what the answer means.

The QR of the bags is 2.83 they can cover the current liabilities and the NPR of the bags is 24% so the company stable for the financial
perspective

(Question No.3)
Clothes

PROBLEM:

If the company financially stable

Step 1 : Identify the Objective of the problem.

Identify which of three ratio of clothes must be focus on and how can improve the ratio

Step 2 : Identify the given of the problem.

a. Is the numerator to be increased/decreased?

b. Is the denominator to be increased/decreased?
c. What are the top three (3) effects when increasing/decreasing the numerator or the denominator? (eg. Increasing the total
liabilities means that MC has to incur more debt)

Step 3 : Provide a detailed solution and the logic behind each step.

A .We need to increase the numerator of NPR to gain more money.

B .Both the numerator and the denominator is increase only the expenses is decreasing.
C. If your going to decrease the expenses you will gain more money

Step 4 : Provide your final answer. Give a short 1-2 sentence answer explaining what the answer means.

We focused on the NPR because the NPR is the lowest among the three ratios.The NPR of 24% is close to the minimum percentage of the
NPR which is 15%.Both Profit and sales should increase and only the expenses should decrease so that the company will gain more money.

Bags

PROBLEM:

If the company financially stable

Step 1 : Identify the Objective of the problem.

Identify which of three ratio of bags must be focus on and how can improve the ratio
Step 2 : Identify the given of the problem.

a. Is the numerator to be increased/decreased?

b. Is the denominator to be increased/decreased?
c. What are the top three (3) effects when increasing/decreasing the numerator or the denominator? (eg. Increasing the total
liabilities means that MC has to incur more debt)

Step 3 : Provide a detailed solution and the logic behind each step.

A.We need to increase the numerator of NPR to gain more money.

B.Both the numerator and the denominator is increase only the expenses is decreasing.
C.If your going to decrease the expenses you will gain more money

Step 4 : Provide your final answer. Give a short 1-2 sentence answer explaining what the answer means.

We focused on the NPR because the NPR is the lowest among the three ratios.The NPR of 24% is close to the minimum percentage of the
NPR which is 15%.Both Profit and sales should increase and only the expenses should decrease so that the company will gain more money.

What happens if net profit margin increases?

For instance, if a company has a net profit margin of 20 percent, it means the company makes 20 cents of profit for each dollar of
sales. A high net profit marginmeans a company is able to control its costs that buy goods and services at prices significantly
higher than it costs to produce or provide them.