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115 CFA
File:
115.040.03.08 Financial Analysis - Reading 21 - 8. Analysis of the Income Statement

# 8. Analysis of the Income Statement

## k. evaluate a company's financial performance using common-size income statements and financial ratios based on the income statement;

What is net profit margin and what is the calculation?
- Net Profit Margin shows how much profit is generated on every dollar of sales.
- $$net\ profit\ margin = \frac{net\ income}{revenue}$$

What is net income?
Net income is earnings after tax but before dividends (EBIT - interest - taxes).

What is gross profit margin and what is the calculation?
- Gross Profit Margin equals percent of sales available after deducting cost of goods sold.
- $$gross\ profit\ margin = \frac{gross\ profit}{revenue}$$

Where does the gross profit margin exist on the income statement? What is it's purpose?
It is in the middle of the income statement - this percentage is available to cover selling, general and administrative costs, and also earn a profit. It indicates the basic cost structure of a company and shows the company's cost-price position.

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