Ratio Analysis

In general, the average ROI for American merchandising companies is between 8% and 12% when using net income, and average margin is 5% to 10%. When using operating income it is between 10 and 15% and average margin is also 10% - 15%. Asset turnover is another important component of the DuPont model and is usually in the range of 1% to 1.5%.
             ROE - Return on Equity .
             The return on equity conveys the profits of the company as a rate of return on the amount of owners" equity. ROE uses average owners equity over the specified time period and net income. Historically a ROE of between 10% and 15% were considered average. Recently higher rates in growth industries have been greater. .
             Price earnings ratio (P/E) .
             In general, the higher the ROI and rate of earnings growth, the higher the P/E. . In the past, for a very long period of time P/E ratios in the range of 12 to 18 were consider good P/E ratios for a company. In recent years, the 12 to 18 values have been abandoned as a norm and what can be considered the norm now is under debate. .
             Sample Companies" Profitability Ratios .
             ROI for Sample CO. is $350 / $7,196 = 4.8% using net income. If operating Income is used we have $498 / $7,196 = 6.9%. An additional measure used for ROI is the DuPont Model. The DuPont model figures are ($498 / $8,251) * ($8,251 / $7,196) = 6.0% using operating income. These are somewhat low when compared to the average.
             ROE is $350 / $3,357 = 10.4% and is also below average. The P/E ratio is $42 / $3.51 = 12, which seems very good, and the dividend payout ratio is 14.2% .
             Activity Measures.
             Activity measures of Inventory turnover, number of days sales in AR, and turnover in building, equipment, and land, look at the relationship between asset levels and sales. They indicate how efficiently a firm is using its assets in relation to its" ROI. .
             Inventory Turnover.
             Inventory turnover uses costs of good sold / average inventory and is an indicator of the efficiency of the firms" management practices.