As we learned, financial ratios are grouped into liquidity ratios, leverage ratios, efficiency ratios, profitability ratios and market value ratios. In this class, we are going to discuss profitability ratios and market value ratios with actual numbers. First, profitability ratio measures how efficiently a firm uses its assets and manages its operations. One of profitability ratios is profit margin. Profit margin is defined as net income divided by sales. For example, the profit margin of Samsung Electronics was 9.32%, that is Samsung generates about 9.32 cents in profit for every dollar in sales. Next, another popular measure of profitability is the return on assets, or ROA for short. ROA is defined as net income divided by total assets, and it measures profit per dollar of assets. For example the ROA of Samsung was 7.72%, therefore, for every dollar of asset, Samsung generated 7.72 cents in profit. Another measure of profitability is return on equity or ROE for short. ROE is defined as net income divided by total equity, and it measures profit per dollar of equity. For example, the ROE of Samsung was 10.44% therefore, for every dollar of equity, Samsung generated 10.44 cents in profit. Is ROA of 7%, or ROE of 10%, good or bad? We do not know whether they are good or bad until we have our comparing numbers. That is, we have to compare current year's performance with the previous year's performance or competitor’s concurrent performance. We are going to talk about this in detail later. Next, we can decompose ROE into the product of several ratios. As we learned before, ROE is net income divided by total equity. We can multiply this ratio by total asset, divide by total assets and then rearrange the equation. And ROE can be a product of ROA and equity multiplier. Where ROA is the ratio of net income by total assets, and equity multiplier is the ratio of total assets by total equity. For example the ROE of Samsung was the ROA of 7.72% x equity multipler of 1.353. Next, we can multiply the equation by sales over sales. And then rearrange the equation so that it includes net income divided by sales and sales divided by total assets. That is ROE is the product of profit margin, total asset turnover, and equity multiplier. For example, Samsung's profit margin was 9.32%, total asset turnover was 0.83. Equity multiplier was 1.353, and the ROE is the product of these three ratios, so it was 10.44%. Using this equation, we can tell how and what effects the ROE. For example, in order to increase ROE, we need to increase profit margin, or total asset turnover, or equity multiplier. We are going to discuss this more with numbers later. The last ratio is the market value ratios. We already learned how the Price-Earnings ratios, when we discussed multiple methods for startup valuation. For example, PER of Samsung was 9.84, so Samsung's stock price was 9.84 times of its earnings per share. You might say that Samsung's shares have or carry a PE multiple of 9.84. The PE ratio implies how much investors are willing to pay by dollar of current earnings. So, higher PER means the firm has significant prospects for future growth. Market-to-book ratio is, in other words, price to book ratio, since stock price per share is the same as the market value per share. In order to calculate Samsung's market-to-book ratio, we have to find book value per share. So the book value of total equity is divided by outstanding number of shares first. And then the stock price per share is divided by book value per share. For example, the market to book ratio of Samsung was 1.03, so far you have learned the definition of financial ratios. Next, we are going to review these ratios with various examples.