Financial Ratios Based on the Income Statement

Financial Ratio		How to Calculate It	What It Tells You
Gross Margin	= = =	Gross Profit ÷ Net Sales $120,000 ÷ $500,000 24.0%	Indicates the percentage of sales dollars available for expenses and profit after the cost of merchandise is deducted from sales. The gross margin varies between industries and often varies between companies within the same industry.
Profit Margin (after tax)	= = =	Net Income after Tax ÷ Net Sales $23,000 ÷ $500,000 4.6%	Tells you the profit per sales dollar after all expenses are deducted from sales. This margin will vary between industries as well as between companies in the same industry.
Earnings Per Share (EPS)	= = =	Net Income after Tax ÷ Weighted Average Number of Common Shares Outstanding $23,000 ÷ 100,000 $0.23	Expresses the corporation's net income after taxes on a per share of common stock basis. The computation requires the deduction of preferred dividends from the net income if a corporation has preferred stock. Also requires the weighted average number of shares of common stock during the period of the net income.
Times Interest Earned	= = =	Earnings for the Year before Interest and Income Tax Expense ÷ Interest Expense for the Year $40,000 ÷ $12,000 3.3	Indicates a company's ability to meet the interest payments on its debt. In the example the company is earning 3.3 times the amount it is required to pay its lenders for interest.
Return on Stockholders' Equity (after tax)	= = =	Net Income for the Year after Taxes ÷Average Stockholders' Equity during the Year $23,000 ÷ $278,000 (a computed average) 8.3%	Reveals the percentage of profit after income taxes that the corporation earned on its average commonstockholders' balances during the year. If a corporation has preferred stock, the preferred dividends must be deducted from the net income.