Our goal today is to show Accounting as a decision-making tool. The Income Statement (called DRE in Brazil, short for Demonstração do Resultado do Exercício) is extremely relevant for assessing the company's performance and the efficiency of its managers in achieving a positive result, since profit is the main objective of companies.The example's income statementTo calculate all the ratios in this lesson, we will use the same company. This is its summarized income statement:LineR$Net sales revenue10,000(−) Cost of goods sold(4,500)(=) Gross profit5,500(−) Operating expenses (including depreciation of 400)(2,400)(=) Operating profit3,100(−) Net financial result(600)(=) Profit before income tax and social contribution2,500(−) Income tax and social contribution (IR and CSLL)(800)(=) Net profit1,700From the balance sheet, we need two more numbers: average total assets for the year were R$ 16,980, and average equity was R$ 8,500.Profitability RatiosAs a first step, we want to measure the company's profitability, that is, how much it earns for each real sold. Measuring profitability means measuring the profit margin. Let's calculate each one:Gross Profit Margin\[ \text{Gross Margin} = \frac{\text{Gross Profit}}{\text{Net sales}} \times 100 = \frac{5,500}{10,000} \times 100 = 55\% \]In terms of Gross Margin, we can say that for every R$ 1 sold, R$ 0.45 is the cost of the goods and R$ 0.55 is gross profit.Operating Profit Margin\[ \text{Operating Margin} = \frac{\text{Operating Profit}}{\text{Net sales}} \times 100 = \frac{3,100}{10,000} \times 100 = 31\% \]In terms of Operating Margin, we can say that for every R$ 1 sold, R$ 0.69 goes to the cost of the goods and to the expenses of selling and administration, leaving R$ 0.31 of operating profit.EBITDA MarginEBITDA (earnings before interest, taxes, depreciation and amortization), called LAJIDA in Portuguese, shows how much result the operation generates before depreciation and amortization, which are not cash outflows. In Brazil, CVM Resolution 156/2022 (CVM is the Brazilian securities regulator) defines the calculation for listed companies: net profit + taxes on profit + net financial result + depreciation, amortization and depletion. From 2027, this resolution will be replaced by the CPC 51 rules on management-defined performance measures (the CPCs are the Brazilian accounting standards, aligned with IFRS).\[ \text{EBITDA} = 1,700 + 800 + 600 + 400 = 3,500 \]\[ \text{EBITDA Margin} = \frac{\text{EBITDA}}{\text{Net sales}} \times 100 = \frac{3,500}{10,000} \times 100 = 35\% \]EBITDA is widely used to compare companies with different levels of debt and investment, but it is neither profit nor cash: it ignores interest, taxes and the wear of assets, which will one day need to be replaced.Net Profit Margin\[ \text{Net Margin} = \frac{\text{Net Profit}}{\text{Net sales}} \times 100 = \frac{1,700}{10,000} \times 100 = 17\% \]From the Net Margin, the main indicator, we conclude that for every R$ 1.00 sold, R$ 0.83 goes to costs, operating expenses, finance costs and taxes on profit, and R$ 0.17 is net profit, what is left for the owners.About profitability ratiosNet sales are used, that is, Gross Revenue minus returns, allowances and taxes on sales.Some businesses work with a small Net Margin, such as:supermarkets;pay-by-weight restaurants;travel package agencies.They make their money on the quantity sold.Others usually work with higher margins on each sale, such as:jewelry stores;high-end hotels;convenience stores.They sell fewer units and make up for it with a higher margin, supported by quality, exclusivity or convenience.A company had net revenue of R$ 50,000, gross profit of R$ 20,000, operating profit of R$ 8,000 and net profit of R$ 5,000. What is the operating margin?Answer: 16% — 8,000 ÷ 50,000 = 16%. 40% is the gross margin and 10% is the net margin: each margin uses the profit of its own stage over the same net sales.A company had net profit of R$ 1,000, income tax and social contribution of R$ 500, net finance costs of R$ 300 and depreciation of R$ 200. What is its EBITDA?Answer: R$ 2,000 — add back to net profit everything EBITDA leaves out: 1,000 + 500 + 300 + 200. R$ 1,800 forgets to add back depreciation, which is precisely the D in the acronym.Return RatiosReturn ratios measure the company's efficiency in the period by comparing profit with investment: how many cents of profit the company earned for each R$ 1 invested.Return on Assets (ROI or ROA)ROI (Return On Investment), which Brazilian textbooks also call the Rate of Return on Investments (TRI), measures the profit generated by the company's assets. When the investment considered is total assets, as here, the ratio is also called ROA (Return On Assets). The formula is:\[ \text{ROI} = \frac{\text{Net Profit}}{\text{Average assets}} \times 100 = \frac{1,700}{16,980} \times 100 = 10\% \]From the company's point of view, each R$ 1 invested in assets brought, on average, a return of R$ 0.10. At this pace, it would take 10 years to recover the investment (payback).Return on Equity (ROE)ROE (Return On Equity), or Rate of Return on Equity (TRPL in Portuguese), is the ratio between net profit and average equity:\[ \text{ROE} = \frac{\text{Net Profit}}{\text{Average equity}} \times 100 = \frac{1,700}{8,500} \times 100 = 20\% \]From the owners' point of view, each R$ 1 they invested yielded R$ 0.20 of profit. The payback would be 5 years.ROE is higher than ROI because half of the assets are financed by third parties: when the profit generated by the assets exceeds the cost of debt, borrowing increases the owners' return (financial leverage).A company earned R$ 300 in the year, with average assets of R$ 3,000 and average equity of R$ 1,200. What are its ROI and ROE?Answer: ROI of 10% and ROE of 25% — ROI = 300 ÷ 3,000 and ROE = 300 ÷ 1,200. ROE is higher because part of the assets is financed by third parties; swapping the two is the most common mistake.Productivity RatiosNow let's measure the company's productivity, that is, how much its investments (Assets) generate in sales.Asset Turnover\[ \text{Asset Turnover} = \frac{\text{Net sales}}{\text{Average assets}} = \frac{10,000}{16,980} = 0.59 \]In this case, the company sold the equivalent of 0.59 times its assets in the year: each R$ 1 of assets generated R$ 0.59 in sales. If it sold exactly the value of its assets, turnover would be 1; if it sold twice its assets, it would be 2. Going from 0.59 to 2 would mean selling more than three times as much with the same assets: more productive assets.A low turnover does not, on its own, mean there are idle assets. It depends heavily on the sector: an electricity distributor, with expensive networks and plants, has a much lower turnover than a supermarket. So compare turnover with that of companies in the same industry and with the company's own previous years.Integrating the ratiosNote that we have two very important indicators:\[ \text{Asset Turnover} = \frac{\text{Sales}}{\text{Assets}} \]\[ \text{Net Margin} = \frac{\text{Net Profit}}{\text{Sales}} \]We want to maximize profits, and to do that we must increase sales with the same assets and increase the profit margin on each sale, that is, maximize both Asset Turnover and Margin. Multiplying the two, Sales cancel out:\[ \text{Asset Turnover} \times \text{Net Margin} = \frac{\text{Sales}}{\text{Assets}} \times \frac{\text{Net Profit}}{\text{Sales}} = \frac{\text{Net Profit}}{\text{Assets}} \]And this indicator is precisely ROI:\[ \text{ROI} = \frac{\text{Net Profit}}{\text{Assets}} \]In the example: 0.589 × 17% = 10%, the same ROI calculated earlier. This breakdown is known as DuPont analysis. So improving Turnover and Margin means achieving a better ROI.A supermarket has a net margin of 5% and an asset turnover of 3. What is its ROI?Answer: 15% — by DuPont analysis, ROI = margin × turnover = 5% × 3. Even with a low margin, high turnover ensures a good return on assets.Exercises1) (CONSULPLAN - 2019 - MPE-PA - Intern - Accounting Sciences) The organization BETA provided the following data for the period:Gross Revenue: R$ 2,500,000.00; Sales taxes: R$ 400,000.00; Net Margin: 13%; Operating Margin: 32%; Gross Margin: 55%.Based on the above, select the alternative corresponding to Gross, Operating and Net Income, respectively.A) R$ 1,155,000.00; R$ 672,000.00; R$ 273,000.00.B) R$ 1,155,000.00; R$ 672,000.00; R$ 325,000.00.C) R$ 1,375,000.00; R$ 800,000.00; R$ 273,000.00.D) R$ 1,375,000.00; R$ 800,000.00; R$ 324,000.00.2) (CONSULPLAN - 2019 - MPE-PA - Intern - Accounting Sciences) The industrial company GETA presented the following information on 12/31/20x9:Gross Revenue: R$ 1,650,000.00; Sales taxes: R$ 150,000.00; Net Margin: 15%; Operating Margin: 30%; Gross Margin: 55%; Total Assets: R$ 8,500,000.00; Equity: R$ 3,500,000.00.It is known that ROA (Return on Assets) can be obtained by dividing net profit by Total Assets and then multiplying by one hundred. ROE (Return on Equity) can also be obtained by dividing net profit by Equity, multiplied by one hundred. Based on the above, select the alternative that corresponds to ROA and ROE, respectively.A) 2.65% and 6.43%.B) 2.65% and 6.53%.C) 2.91% and 7.17%.D) 2.91% and 7.27%.3) (VUNESP - 2014 - EMPLASA - Administrative Analyst - Accounting Sciences) Regarding the economic and financial analysis of financial statements, based on the Balance Sheet as of December 31, 2013, and on the Income Statement for that year, shown below, answer the question. Note that the ratios must be shown to two decimal places.Calculate the net margin (%) for the year.A) 4.50.B) 4.81.C) 5.08.D) 5.29.E) 5.75.4) (CESPE - 2013 - TCE-RO - Accountant) Regarding the economic and financial analysis of companies based on financial statements, judge the following item.Operating margin and net margin, which are indicators that assess the company's efficiency in generating profit through sales, have average total assets as their denominator. True or false?5) (FGV - 2018 - MPE-AL - Public Prosecutor's Office Auditor) An entity presented, on 12/31/2017, the following Income Statement:Regarding the entity's gross margin and net margin, choose the correct option.A) The gross margin is 8.25%, while the net margin is 25%.B) The gross margin is 12.5%, while the net margin is 25%.C) The gross margin is 25%, while the net margin is 8.25%.D) The gross margin is 25%, while the net margin is 33%.E) The gross margin is 33%, while the net margin is 12.5%.6) (Avança SP - 2022 - Municipal Chamber of Sorocaba - Budget and Financial Analyst - EXAM ANNULLED) One of the most important return ratios is Return on Assets (ROI). What does it analyze?A) It analyzes the company's indebtedness.B) It analyzes the return obtained on Equity.C) It analyzes how much the company invested in Permanent Assets.D) It analyzes total investments.E) It analyzes the company's return in relation to the level of investments.7) (FCC - 2013 - SERGAS - Marketing Analyst) ROI is one of the most commonly used measures in evaluating marketing programs, and meansA) Return on Investment, or the calculation of the returns obtained from the investment made in marketing actions.B) Operational Results of Marketing Impacts, that is, the evaluation of the changes obtained through the management of the variables of the marketing mix.C) Reactivation of Interrupted Operations, that is, the company's ability to reactivate customers who stopped making purchases but who were active in the past.D) Results on Incomes, that is, Revenue Results that express the organization's sales performance in relation to the accounting goals established for the quarter.E) Rewards On Impacts, that is, rewards on the impacts of strategic marketing management activities.8) (CONSULPLAN - 2019 - MPE-PA - Intern - Accounting Sciences) ROI (Return on Operating Investment) can be obtained by multiplying the operating margin by the operating asset turnover. Which of the following does NOT contribute to increasing ROI?A) Reduction of operating assets.B) Increase in operating income.C) Reduction of administrative expenses.D) Increase in the Income Tax provision.Answers1) A. Net revenue = R$ 2,500,000 − R$ 400,000 = R$ 2,100,000. Gross: 55% = R$ 1,155,000; operating: 32% = R$ 672,000; net: 13% = R$ 273,000.2) A. Net revenue = R$ 1,500,000; net profit = 15% = R$ 225,000. ROA = 225,000 ÷ 8,500,000 = 2.65%; ROE = 225,000 ÷ 3,500,000 = 6.43%.3) C. Net margin = net profit ÷ net sales revenue = 9,000 ÷ 177,000 = 5.08%. (On gross revenue of 205,000 it would be 4.39%, which is not among the options.)4) False. The denominator of the margins is net sales, not assets.5) C. Gross margin = gross profit ÷ sales = 200,000 ÷ 800,000 = 25%; net margin = 66,000 ÷ 800,000 = 8.25%.6) E.7) A.8) D. Income Tax is below operating income and does not change operating ROI.
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