Financial Leverage, Eps and Profit Margin Essay

Profits might be comp bed with sales, assets, or stockholders rectitude. Why might in all common chord bases be used? go forth trends in these ratios always perish in the same direction?All the three bases are used to find the hap get with respective to sales as well as investment made. When the lettuce is compared with sales, it is called as the net dough strand. When the wage is compared with assets, it is called as fork up earned on total investment and when profit is compared with stockholders equity, it is called as return on equity. All these are positiveness ratios and help to analyze the profitability at a particular head with respect to various bases. The trend in these ratios whitethorn not always move in the same direction. For example, return on assets may increase from one issue to another, but not necessarily the return on equity. A cause for this may be cod to change in capital structure and mix of debt and equity.Would you wait the profit margin in a tone jewelry break in to protest from that of a grocery store? Comment.Yes. The profit margin in a quality jewelry store may differ from that of a grocery store. A jewelry stores profit margin would be much higher than of a grocery store. A grocery store will have a pooh-pooh profit margin with respect to sales and earns its profits by selling much volume. But in the case of a jewelry store, the profit margin earned on each unit would be higher.Give a simple rendering of meshwork per share. Earnings per share shag be defined as the lettuce available to equity shareholders after the allowance of preferred dividends, if any, with respect to one share. It is calculated as net income available to equity shareholders divided by the number of large equity shares.Define pecuniary supplement. What is its burden on earnings? When is the use of fiscal leverage beneficial and disadvantageous? The issue to which a firm uses fixed income securities tin can be termed as a mo netary leverage. The fixed income securities include bonds and debentures. The effect on earnings includes reduction of profits due to payment of fixed pursuance on these securities. The use of financial leverage is advantageous especially when the leverage is at the optimum level. At this level, the existence of leverage maximizes the earnings per share of the equity holders. This is because all the superabundance profits after the payment of interest go to the equity holders. The use of financial leverage is disadvantageous when it exceeds the optimal level. When the leverage is too high, it increases the risk of the company as well as the cost of capital. This withal reduces the long term solvency of the business.