Purchasing and Financing 2024

ent, and wage expenses, but before deducting interest and income tax expenses. It’s also
referred to as EBIT (earnings before interest and income taxes) and is a measure of a
company's profitability from operations.
As a percentage of sales, it is called operating margin, and calculated as follows:
Operating Margin = Operating Income/Sales
Both are key measures of how effective a company is at controlling the costs and
expenses associated with its normal business operations.
The 80/20 Principle
The 80/20 Principle was devised by Vilfredo Pareto (1848-1923), to demonstrate that 80%
of wealth comes from 20% of the population. This principle could also be applied outside
economics to just about anything.
When applied to a company’s product line it means that 80% of a company's revenue
comes from 20% of the products. Off cause the 80/20 Principle can also apply to revenue
and expenses. Roughly 80% of your sales may come from 20% of your products. Similarly,
80% of your sales may be supported by 20% of your expenses.
Evaluating the Growth of a Business
The final number to look at on the income statement is net income as.
Net Profit Margin = Net Income/Sales
The Income Statement separates Operating Revenue, revenue generated from the main
operations of the business, from non-operating revenue. The Income Statement also
separates Operating Expenses, those expenses required to support the main operations of
the business, from non-operating expenses. Income Taxes and interest are considered
non-operating expenses.
To evaluate the growth of the company these figures must of cause be compared with
those of preceding periods to see if growth rate is declining or improving.
Evaluating the Returns on Investment in a Company
a. Return on Equity
Return on Equity (ROE) is one of the most important financial ratios in business. It
measures how well a company used Owner's Equity to generate profits and is regarded is
the best indicator of bottom-line performance by some analysts.
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