The information necessary to determine a company's profit as a percentage of sales can be found in the company's 1. Magnetronics' profit as a percentage of sales for 1999 was S 2. This represented an increase/decrease from divided by or % in 1995 3The deterioration in profitability resulted from an increase/decrease in cost of goods sold as a percentage of sales, and from an increase/decrease in operating expenses as a percentage of sales. The only favorable factor was the decrease in the Management and investors often are more interested in the return earned on the funds invested than in the level of profits as a percentage of sales. Companies operat ing in businesses requiring very little investment in assets often have low profit mar gins but earn very attractive returns on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that earn miserably low re- turns on invested funds, despite seemingly attractive profit margins. Therefore, it is useful to examine the return earned on the funds provided by the shareholders and by the "investors" in the company's interest-bearing debt. To increase the comparability across companies, it is useful to use EBIAT (earnings before interest but after taxes) as the measure of return, The use of EBIAT as the measure of return also allows the analyst to compare the return on invested capital (calculated before the deduction of interest expense) with the company's estimated cost of capital to deter mine the long-term adequacy of the company's profitability Magnetronics had a total of S earned before interest but after taxes (EBIAT) S return on invested capital is calculated as follows: of capital at year-end 1999 and during 1999. Its 4. Earnings before interest but after taxes (EBIAT) Owners' equity plus interest-bearing debt In 1999 this figure was he 76 %, which represented an increase/decrease from % earned in 1995 From the viewpoint of the shareholders, an equally important figure is the company's return on equity. Return on equity is calculated by dividing profit after tax by the own- ers' equity Profit after taxeS Return on equity Owners'equity Return on equity indicates how profitably the company is utilizing shareholders' fnds. of owners, equity and earned $ on equity was 5. Magnetronics had $ 96, an improvement/deterioration after taxes in 1999. Its return from the % earned in 1995 Management can "improve" (or "hurt") its return on equity in several ways. Each method of "improvement" differs substantially in nature. The analyst must look behind the return on equity figures and must understand the underlying causes of any changes. For example, did Return on Sales improve? Did the company's management of assets change? Did the company increase the use of borrowed funds relative to owners' equity? These three possible explanations are combined in the Du Pont system of ratio analysis Net Income Sales Assets Sales Assets Equity ROE =