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Success Measures > Criteria Definitions

RETURN ON SALES (ROS) Formula Description: You determine return on sales by dividing net profit by net sales

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What Does Return On Sales Tell You? Since return on sales (ROS) gives the analyst an idea of the profit margin on a product, this ratio can reveal a great deal about product positioning and pricing policies. For example, a high ROS suggests premium pricing. This suggests the product will not be aimed at a commodity market. ROS is also a good indicator of demand and supply within the industry. The more competitive an industry, the more pressure there is on price and subsequently ROS falls. For example, the ROS of the airline industry has been low due to intense competition in the last few years.

Typical Range: The general acceptable range is from 2% to as high as 16%. Return on sales is very industry dependent. Here are some examples of figures from 1998:

Coca Cola = 18.8%

Merck = 19.5%

Ford = 15.3%

Caterpillar = 7.2%

AT&T = 9.8%

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RETURN ON ASSETS (ROA) Formula Description You determine return on assets by dividing net profit by your total asset base.

What Does Return On Assets Tell You? Return on assets is an efficiency ratio. It compares the profits generated with the asset base required. It answers the question, how hard are you working your assets? There is an economic opportunity cost notion associated with this ratio. An operating manager may be challenged with how a dollar spent on assets might do compared with a dollar invested in some other area (e.g., a bank account), or how the ROA compares with the interest a firm is paying on the money borrowed to pay for the asset. ROA analysis can generate interesting discussions surrounding investment in more flexible manufacturing capabilities versus higher inventory levels.

Typical Range: This ratio is volatile. Here are some examples of figures from 1993:

The Gap = 16%

Deere and Company = 3%

Coca Cola = 19%

GM = 1%

Boeing = 6%

Caterpillar = 5%

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RETURN ON EQUITY (ROE) Formula Description: Return on equity (ROE) is net profit divided by total equity.

What Does Return On Equity Tell You? Return on equity tells you how effectively a company is using the dollars invested in it by stockholders. According to Forbe's Magazine, ROE is the most often quoted single statistic when describing a firm's performance. It is also one of the statistics considered to be most useful by stockholders.

Typical Range: Because of the huge swing in debt positions the range of ROE is very wide. Here are some examples of figures from 1998:

Coca Cola = 44.9%

Ford = 92.6%

Intel = 27.8%

GM = 19.7%

Caterpillar = 29.5%

AT&T = 21.4%

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ASSET TURNOVER (T/O) Formula Description: Asset turnover is derived by dividing period sales by average total assets.

What Does Asset Turnover Tell You? Asset turnover tells an analyst more about volume of sales than it does about profitability (the numerator is a top line number on the income statement, not a bottom line number). Asset turnover (T/O) demonstrates how effective the asset base is in generating top line revenue. High T/O values have implications in terms of plant structure, level of backward integration, and aggressiveness of pricing policy.

Typical Range: The generally acceptable range is from .6 to as high as 3.0. Asset turnover is very industry dependent. Here are some examples of figures from 1993:

Caterpillar = 0.78

Deere and Company = 0.71

Microsoft = 1.0

K-Mart = 1.6

Walgreens = 3.1

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STOCK PRICE Formula Description: Stock Price is a function of book value. EPS and average dividend and investment.

What Does Stock Price Tell You? This is an indication of the value independent investors believe your shares possess.

Typical Range: The generally acceptable range for Capstone is from $38.00 to a high of $120.00.

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CUMULATIVE PROFITS Formula Description: Cumulative Profits is the total of all year's Net Profit.

What Does Cumulative Profits Tell You? How Profitable the company has been over time

Typical Range: $20 million to $100 million

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MARKET SHARE BY DOLLAR Volume Formula Description: Percentage share of industry sales dollars.

What Does Market Share in Dollars Tell You? What portion of total industry sales a company has captured.

Typical Range: 10% to 45%

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MARKET CAP Formula Description: Market Capitalization is calculated by determining the weighted average number of shares for a given period and then multiplying that number by the closing Stock Price.

What Does Market Cap Tell You? The recognition that Market Cap is a function of both share price and share volume is significant for this number tells you more about the real value of the company than just the share price alone. In the extreme a corporation could be trading at a huge P/E multiple but if it only had relatively few shares outstanding then the company would not be worth as much as a company that was trading at a relatively poor multiple but had a large number of shares outstanding. Market Cap is then, the truest indication of the markets estimate of a company's worth.

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