Debt-Utilization Ratios & Profitability Ratios: Cadalzo Liu Monzon Tuco Villabrille

Debt-Utilization Ratios
&
Profitability Ratios
Cadalzo
Liu
Monzon
Tuco
Villabrille
DEBT-UTILIZATION
RATIOS
What is Debt-Utilization Ratios?
Debt utilization ratios provide a

comprehensive picture of the company's
solvency or long-term financial health.
DEBT-UTILIZATION
RATIOS
 The debt ratio is a financial ratio that indicates the

percentage of a company's assets that are provided
via total debt.
 Formula: Debt Ratio = Total Debt / Total Assets
DEBT-UTILIZATION
RATIOS
Example:
 If Company S has P2,000,000 in total
assets and P500,000 in total liabilities, it
would have a debt ratio of 25%.
NOTE: The higher the ratio, the greater the risk

associated with the firm's operation.
DEBT-UTILIZATION
RATIOS
 The debt-to-equity ratio is a financial ratio indicating

the relative proportion of shareholders' equity and
debt used to finance a company's assets.
 Formula: D/E = Debt(liabilities)/Equity
DEBT-UTILIZATION
RATIOS
Example:
 If Company S has a total liabilities of
P3,000 and its shareholders' equity is
P2,500, then the debt-to-equity ratio is 1.2.
DEBT-UTILIZATION
RATIOS
 The debt service coverage ratio (DSCR), also

known as debt coverage ratio (DCR), is the ratio of
cash available for debt servicing to interest, principal,
and lease payments.
 Formula: DSCR = Net Operating Income / Debt
Service*
*To get Debt Service: DS = Interest & Lease
Payments + Principal Repayments
DEBT-UTILIZATION
RATIOS
 Example
DEBT-UTILIZATION
RATIOS
 Step 1: Write out the formula
DSCR = Net Operating Income / Debt Service
 Step 2: Find the Net Operating Income
The operating income is found by subtracting the operating

expenses from the firm’s gross profit. In this example, it is
equal to $600M.
 Step 3: Find the Debt Service
The debt service will typically be located below the operating

income, as the entity must pay their interest
and principal payments before tax. Debt service is just the
interest expense in this example, which is equal to $200M.
DEBT-UTILIZATION
RATIOS
 Step 4: Calculate to find the DSCR
DSCR = Net Operating Income / Debt Service
DSCR = $600M / $200M = 3 (or 3x as it’s a ratio)
PROFITABILITY
RATIOS
What is Profitability Ratios?
A profitability ratio is a measure of

profitability, which is a way to measure a
company's performance.
PROFITABILITY
RATIOS
Types of Profitability Ratios

Gross margin tells you about the profitability of
your goods and services. It tells you how much it
costs you to produce the product.
Formula: Gross Margin = Gross Profit/Net Sales
* 100
: GM = GP / NS * 100
PROFITABILITY
RATIOS
 Example: Imagine that you run a company

that sold P50,000,000 in running shoes last
year and had a gross profit of P7,000,000.
What was your company's gross margin for
the year?
1. GM = P7,000,000 / P50,000,000 * 100
2. GM = .14 * 100
3. GM = 14%
PROFITABILITY
RATIOS

Operating Margin takes into account the costs
of producing the product or services that are
unrelated to the direct production of the product
or services, such as overhead and administrative
expenses.
Formula: Operating Margin = Operating Profit /
Net Sales * 100
: OM = OP / NS * 100
PROFITABILITY
RATIOS
 Example: Let's say you make and sell
computers. Last year, you generated net
sales of P12,000,000, and your operating
income was P100,000,000. What was your
operating margin?
1. OM = OI / NS * 100
2. OM = P12,000,000 / P100,000,000 * 100
3. OM = 0.12 * 100
4. OM = 12%
PROFITABILITY
RATIOS

Return on assets measures how effectively the
company produces income from its assets.
Formula: Return on Assets = Net Income /
Assets * 100
: ROA = NI/A * 100
PROFITABILITY
RATIOS
 Example: Imagine that you are the president of a
large company that manufactures steel. Last
year, your company had net income of
P25,000,000, and the total value of its assets,
such as plant, equipment and machinery, totaled
P135,000,000. What was your return on assets
last year?
1. ROA = P25,000,000 / P135,000,000 * 100
2. ROA = 0.185 * 100
3. ROA = 18.5%
PROFITABILITY
RATIOS

Return on equity measures how much a
company makes for each peso that investors put
into it.
Formula: Return on Equity = Net Income /
Shareholder Investment * 100
: ROE = NI/SI * 100
PROFITABILITY
RATIOS
 Example: Imagine that your social media
company just went public last year, resulting in
total investment of P100,000,000. Your
company’s net income for the year was
P10,000,000. What is the return on equity?
1. ROE = P10,000,000 / P100,000,000 * 100
2. ROE = 0.1 * 100
3. ROE = 10%
PROFITABILITY
RATIOS

Return on sales, often called the operating
profit margin, is a financial ratio that calculates
how efficiently a company is at generating profits
from its revenue.
Formula: Return on Sales = Operating Profit /
Net Sales * 100
: ROS = OP/NS * 100
PROFITABILITY
RATIOS
 Example: Assume Jim’s Bowling Alley generates
P500,000 of business each year and shows
operating profit of P100,000 before any taxes or
interest expenses are accounted for. What is the
return on sales?
1. ROS = P100,000 / P500,000 * 100
2. ROS = 0.2 * 100
3. ROS = 20%
PROFITABILITY
RATIOS

Return on Investment calculates the profits of
an investment as a percentage of the original
cost.
Formula: Return on Investment = Investment Revenue
– Investment Cost / Investment Cost * 100
: ROI = IR – IC / IC * 100
PROFITABILITY
RATIOS
 Example: S made a somewhat risky investment in a
liquid metals stock last year when he purchased
5,000 shares at P1 per share. Today, a year later,
the fair value market of per share is P3.50. What is
the return on investment?
1. ROI = P17,500 – P5,000 / P5,000* 100
2. ROI = 2.5 * 100
3. ROI = 250%
to get P17,500, just simply multiply P5.000 to P3.50

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Debt-Utilization Ratios

What is Debt-Utilization Ratios?

Debt utilization ratios provide a

 The debt ratio is a financial ratio that indicates the

NOTE: The higher the ratio, the greater the risk

 The debt-to-equity ratio is a financial ratio indicating

 The debt service coverage ratio (DSCR), also

The operating income is found by subtracting the operating

The debt service will typically be located below the operating

What is Profitability Ratios?

A profitability ratio is a measure of

Types of Profitability Ratios

 Example: Imagine that you run a company

Types of Profitability Ratios

Types of Profitability Ratios

Types of Profitability Ratios

Types of Profitability Ratios

Types of Profitability Ratios

to get P17,500, just simply multiply P5.000 to P3.50

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