Operating Performance

The measurement of operating performance is used to analyze and determine how well management operates a company.

Operating efficiency - revealed if the company’s assets were utilized efficiently.

Total asset turnover = Sales / Average total net assets.
(Differene across industries; manufacturing business that are capital intensive, near 1; Retail business- near 10; If too low->capital tied up; If too high-> too few assets for potential sales or asset base is outdated)

Fixed asset turnover = Sales / Average net fixed assets.
(utilization of fixed asset, If low,->means too much capital tied up in its asset base; If too high-> has obsolete equipment)

Equity turnover = Sales / Average equity.
(measure of employment of owner’s capital, include preferred/common stock, paid-in-capital & retained earning; about capital structure as co can increase this ratio by using more debt financing)

Working capital turnover = Revenue / average working capital

Operating profitability - related to the company’s overall profitability

Gross margin = Gross profit / Sales = (Sales - COGS) / Sales.
(concerned if too low)

Operating margin = Operating profit / Sales = EBIT / Sales.
concerned if too low)

Net margin = Net income / Sales
(concerned if too low)

Return on total capital (ROTC) = EBIT / Average total capital.
(should add back gross interest expense as total capital includes debt. Do Not use net interest expense,i.e. gross interest expense – interest income; total capital is the same as total asset, concerned if too low)

Return on total equity (ROE) = NI / Average total equity
= (net income /sales) (Sales / total assets) (total assets / equity)
(concerned if too low, include preferred stock)

Return on owners’ equity = (NI - Preferred dividends) / (Average total equity – Preferred stock) (concerned if too low)