Profitability Ratios

Profitability ratios are financial metrics used to assess a company’s ability to generate profit relative to its Revenue, Assets, or Equity. These ratios provide insights into how efficiently a company is performing and its overall financial health.

Examples of Profitability Ratios:

• Margin/">Gross Profit Margin: Calculated as (Gross Profit / Revenue) x 100. This ratio indicates the percentage of Revenue that exceeds the Cost of Goods Sold.
• Margin/">Net Profit Margin: Calculated as (Net Income / Revenue) x 100. This measures how much of each dollar of Revenue is converted into profit.
• Return on Assets (ROA): Calculated as (Net Income / Total Assets) x 100. This ratio shows how effectively a company is using its Assets to generate profit.
• Return on Equity (ROE): Calculated as (Net Income / Shareholder’s Equity) x 100. This indicates how well the company is using Shareholders’ funds to generate profit.

Cases:

Consider a company with a Revenue of $1,000,000, a Gross Profit of $600,000, Net Income of $200,000, total Assets of $500,000, and Shareholder’s Equity of $300,000:

• Margin/">Gross Profit Margin: (600,000 / 1,000,000) x 100 = 60%
• Margin/">Net Profit Margin: (200,000 / 1,000,000) x 100 = 20%
• Return on Assets: (200,000 / 500,000) x 100 = 40%
• Return on Equity: (200,000 / 300,000) x 100 = 66.67%