Basic Finance 3 - Profit and return ratios

Calculating profit and return ratios

To continue the series about financial ratios, this is a post to show how to calculate the two main profit and return ratios.

I am going to use data from Magazine Luiza. You can download the data from here. The source of this spreadsheet is the website Fundamentus.com. I can’t be sure this site is always correct. But in all the times that I checked, I’ve never found an error.

These are the numbers in the last quarter (2nd quarter of 2020).

This is the Profit Margin:

$$Profit\ Margin = \frac{Net\ profit}{Revenues} = -0.0116$$

This is the EBITDA Margin:

$$EBITDA\ Margin = \frac{EBITDA}{Revenues} = -0.0221$$

This is the Return on Assets:

$$ROA = \frac{Net\ profit}{Total\ assets} = -0.0031$$

This is the Return on Equity:

$$ROE = \frac{Net\ profit}{Total\ Equity} = -0.0087$$

And below, you can see the evolution of these ratios. Notice that the X-axis is inverted, so we need to look the evolution from right to left (see the axis' legend).

Overall, there are only a few quarters the company has negative profitability. The average profit margin in this period is around 1.5%, which is a good quarter number, in my view. Excluding the last quarter, where the profit was negative due to the COVID crisis, the company seems well managed, with good control costs and appropriate return generation.

Notice that the quarters where net profit is negative, all ratios are negative. Also notice that ROE is always higher than ROA in absolute values, since the company has positive debt.

I will continue this series of indicators. We still are going to see Working Capital ratios, Valuation ratios, Interest Coverage ratios, and some others.

I hope you like this series. Thanks for passing by!

Henrique Castro Martins
Henrique Castro Martins
Assistant Professor of Finance
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