Profitability Ratio

•Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a previous period indicates that the company is doing well.

Profit Margin

•Profit margin is a profitability ratio calculated as net income divided by revenue, or net profits divided by sales. Net income or net profit may be determined by subtracting all of a company’s expenses, including operating costs, material costs (including raw materials) and tax costs, from its total revenue. Profit margins are expressed as a percentage and, in effect, measure how much out of every dollar of sales a company actually keeps in earnings. A 20% profit margin, then, means the company has a net income of $0.20 for each dollar of total revenue earned.




Net Income = $30,000
Net Sales = $100,000

Profit Margin = $30,000
            $100,000

Profit Margin = 30%


Return on Assets

•Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings.



Net Income = $100,000
Total Assets = $500,000

ROA = $100,000
            $500,000

ROA = 20%


Return on Equity

•Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.



Net Income = $10,000
  Shareholder’s Equity = $20,000

  ROE = $10,000
              $20,000

  ROE = 50%



Last modified: Tuesday, August 14, 2018, 8:39 AM