Profitability Ratios:


table of content

1. Introduction ........................................................................................................... 2

2. What are Profitability Ratios? .............................................................................. 3

3. Types of Profitability Ratios ................................................................................ 4

3.1 Gross Profit Margin .......................................................................................... 4

3.2 Operating Profit Margin .................................................................................. 5

3.3 Net Profit Margin ............................................................................................ 5

3.4 Return on Assets (ROA) ................................................................................... 6

3.5 Return on Equity (ROE) ................................................................................... 6

3.6 Earnings Per Share (EPS) ................................................................................ 7

4. Conclusion ........................................................................................................... 8

5. References ........................................................................................................... 9



1. Introduction


Profitability ratios are a set of financial metrics that measure a company’s ability to generate profits from its operations. They are one of the most important indicators of a company’s performance and are used to evaluate the financial health of a business.


Profitability ratios provide a measure of the company’s overall performance, as well as its ability to generate profits from its operations. They are used to compare companies within the same industry, and to assess how efficient a company is in using its resources to generate profits.


2. What are Profitability Ratios?


Profitability ratios are financial metrics used to assess a company’s ability to generate profits. They measure the company’s performance and are used to evaluate the financial health of a business. They are calculated by dividing a company’s net income by its total revenue or total assets.


Profitability ratios provide a measure of the company’s overall performance, as well as its ability to generate profits from its operations. They are used to compare companies within the same industry, and to assess how efficient a company is in using its resources to generate profits.


3. Types of Profitability Ratios


The following are the most common profitability ratios used by investors and analysts: 


3.1 Gross Profit Margin


The gross profit margin is a profitability ratio that measures the percentage of revenue that a company is able to keep after subtracting the cost of goods sold (COGS). It is calculated by dividing the company’s gross profit by its total revenue.


Gross profit margin is a measure of how efficient a company is at generating profits from its operations. A higher gross profit margin indicates that the company is able to generate more profits from its operations.


3.2 Operating Profit Margin


The operating profit margin is a profitability ratio that measures the percentage of revenue that a company is able to keep after subtracting operating expenses. It is calculated by dividing the company’s operating profit by its total revenue.


Operating profit margin is a measure of how efficient a company is at generating profits from its operations. A higher operating profit margin indicates that the company is able to generate more profits from its operations.


3.3 Net Profit Margin


The net profit margin is a profitability ratio that measures the percentage of revenue that a company is able to keep after subtracting all expenses, including taxes. It is calculated by dividing the company’s net income by its total revenue.


Net profit margin is a measure of how efficient a company is at generating profits from its operations. A higher net profit margin indicates that the company is able to generate more profits from its operations.


3.4 Return on Assets (ROA)


The return on assets (ROA) is a profitability ratio that measures the percentage of profits a company is able to generate from its total assets. It is calculated by dividing the company’s net income by its total assets.


Return on assets (ROA) is a measure of how efficient a company is at generating profits from its operations. A higher return on assets (ROA) indicates that the company is able to generate more profits from its operations.


3.5 Return on Equity (ROE)


The return on equity (ROE) is a profitability ratio that measures the percentage of profits a company is able to generate from its shareholders’ equity. It is calculated by dividing the company’s net income by its shareholders’ equity.


Return on equity (ROE) is a measure of how efficient a company is at generating profits from its operations. A higher return on equity (ROE) indicates that the company is able to generate more profits from its operations.


3.6 Earnings Per Share (EPS)


The earnings per share (EPS) is a profitability ratio that measures the amount of profits a company is able to generate per each outstanding share of its common stock. It is calculated by dividing the company’s net income by its total number of outstanding shares.


Earnings per share (EPS) is a measure of how efficient a company is at generating profits from its operations. A higher earnings per share (EPS) indicates that the company is able to generate more profits from its operations.


calculattion of all the ratios for a dummy resturant business example 


Gross Profit Margin:


Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue

= ($1000 - $500) / $1000

= 0.5 (50%)


Operating Profit Margin:


Operating Profit Margin = (Operating Profit) / Revenue

= ($400 - $100) / $1000

= 0.3 (30%)


Net Profit Margin:


Net Profit Margin = (Net Income) / Revenue

= ($300 - $150) / $1000

= 0.15 (15%)


Return on Assets (ROA):


Return on Assets (ROA) = (Net Income) / Total Assets

= ($300 - $150) / $1000

= 0.15 (15%)


Return on Equity (ROE):


Return on Equity (ROE) = (Net Income) / Shareholders' Equity

= ($300 - $150) / $1000

= 0.15 (15%)


Earnings Per Share (EPS):


Earnings Per Share (EPS) = (Net Income) / Outstanding Shares

= ($300 - $150) / 1000

= 0.15 (15%)


4. Conclusion


Profitability ratios are a set of financial metrics used to assess a company’s ability to generate profits. They are one of the most important indicators of a company’s performance and are used to evaluate the financial health of a business. The most common profitability ratios are gross profit margin, operating profit margin, net profit margin, return on assets (ROA), return on equity (ROE) and earnings per share (EPS). These ratios provide a measure of the company’s overall performance, as well as its ability to generate profits from its operations.


5. References


Investopedia. (2020, October 22). Profitability Ratios. Retrieved from https://www.investopedia.com/terms/p/profitabilityratios.asp 


Investopedia. (2019, October 21). Return On Equity (ROE). Retrieved from https://www.investopedia.com/terms/r/returnonequity.asp 


Investopedia. (2019, November 12). Earnings Per Share (EPS). Retrieved from https://www.investopedia.com/terms/e/eps.asp


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