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ACG Group - Essay Example
Finance & Accounting
Pages 2 (502 words)
Profitability ratios help users of financial statements to understand managements’ effectiveness in generating profits from business operations and section reviews and compares profitability rations of Baxter International and Becton, Dickens and Company…
Earnings per Share Earnings Per Share (EPS) is one of the commonly used and defines the amount of money that a business pays per share of its ordinary stock. The ratio is a significant indicator of returns on investors’ money and influences interest in organizations’ stock prices. It is computed by subtracting preference share earnings from net income after tax and dividing the remaining amount by the number of ordinary shares for an organization. The EPS is a strong profitability indicator because it is a derivative of profits. Baxter offered EPS of $ 551 while Becton offered EPS of $ 5.69. The high EPS for Baxter than Becton suggest higher profitability at Baxter than Becton because it the organization’s net profits that influence the amount offered in EPS. The difference between values of EPS offered by the two organizations is also too wide to have occurred by chance and instead indicates differences in profitability. Observed differences in the two EPS rations imply that investing in Baxter is more profitable than investing in Becton (Siddiqui, 2006). Profit rate Profit margin defines the ratio of gross profits to sales and shows an organization’s efficiency in managing its cost of goods sold. ...
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