Profitability Ratios

Profitability Ratios Definition-


Profitability ratios measure a company’s ability to generate income relative to revenue, balance sheet assets, operating costs, and equity.

Gross Margin Ratio


gross margin = diff btwn production/ aquisition price and selling price (in %). BASICALLY % of a company's revenue that's retained after direct expenses such as labor & materials have been subtracted

profitability ratio that compares the gross margin of a company to its revenue. It shows how much money is left over aka profit a company makes after paying off its Cost of Goods Sold (COGS --> cost of producing goods/ services sold by an enterprise). Indicates the efficiency of production

FORMULA:

= Revenue - Cost of Goods Sold / Revenue

Return on Assets Ratio (ROA)


Measures how efficiently a company is using its assets to generate profit and earnings

• profitability ratio that shows how much profit a company generates from its assets

• Return on assets (ROA) measures how effective a company's management is in generating profit from the total assets on its balance sheet

• good return on assets is in the 10% range. above that is excellent & below 5% is considered harmful. 15% or higher = very well. 1% or lower --> in trouble. If the return on assets is less than one, you lose money.

FORMULA:

= Net Income / Average Total Assets

Return on Equity Ratio


shows how well company is managing the capital that shareholders have invested in it

• how efficiently company is using its equity to generate profit. Indicates how efficiently equity capital is being used measure of a company's financial performance.

• dividing net income by shareholders' equity -cause shareholders' equity is equal to a company's assets minus its debt, ROE = way of showing a company's return on net assets. (Net income = what business/ individual makes after taxes, deductions, & other expenses r taken out)

FORMULA:

= Net Income / Average Shareholder's Equity