Profitability Ratios - Explained
What are Profitability Ratios?
Written by J. Mance Gordon
Updated at April 19th, 2024
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What are Profitability Ratios?
Profitability Ratios are used to determine how profitable is a given company as compared to a different company.
The most common ratios used for this comparison include:
Gross Margin Ratio
Gross margin ratio = Gross margin / Net sales
Indicates the gross margin generated for each dollar in net sales.
Profit Margin Ratio
Profit margin ratio = Net income / Net sales
Indicates the profit generated for each dollar in net sales.
Return on Assets
Return on assets = Net income / Average total assets
Indicates how much net income was generated from each dollar in average assets invested.
Return on Shareholder's Equity
Return on common shareholders’ equity = (Net income − Preferred dividends) /Average common shareholders’ equity.
Indicates how much net income was generated from each dollar of common shareholders’ equity.
Earnings Per Share
Earnings per share = Net income − Preferred dividends / Weighted average common shares outstanding.
Indicates how much net income was earned for each share of common stock outstanding.
Related Topics
- Trend Analysis of Financial Statements
- Common-Size Analysis (Vertical Analysis) of Financial Statements
- Common-Size Financial Statement
- Net Dollar Retention
- Horizontal Analysis
- Per Share Basis
- Profitability Ratios
- Gross Margin Ratio
- Profit Margin
- After Tax Profit Margin
- Return on Assets
- Total Shareholder Return
- Cash on Cash Return
- Earnings Per Share
- Diluted Earnings Per Share
- Asset Turnover Ratio
- Berry Ratio
- Break-Even Analysis
- Liquidity Ratio
- Current ratio (Working Capital Ratio)
- Working Ratio
- Quick Ratio
- Quick Assets
- Days Sales Outstanding
- Cash Ratio (Operating Cash Flow Ratio)
- Receivables turnover ratio (often converted to average collection period)
- Accounts Payable Turnover Ratio
- Inventory turnover ratio (often converted to average sale period)
- Solvency (Coverage Ratios)
- Leverage Ratio (Debt Ratio)
- Asset Coverage Ratio
- Debt to Equity
- Debt to Income Ratio
- Debt Coverage Ratio
- Times Interest Earned
- Market Capitalization
- Price to Equity Ratio
- Book-To-Market Ratio
- Price to Earnings Ratio
- Price to Earnings Growth (PEG) Ratio
- Price to Earnings Growth Payback Ratio
- CAPE Ratio
- Price to Cash Flow Ratio
- Capital Maintenance
- Book to Bill Ratio
- Asset Turnover Ratio
- Plowback Ratio
- Days Inventory Outstanding
- Days Payable Outstanding
- Days Sales Outstanding
- Non-financial Performance Measures: The Balance Scorecard