In this article, we’ll discuss all profitability ratios that the financial analysts and accountants commonly use. But first, let’s see the definition of profitability ratios.
What are profitability ratios?
Profitability ratios are financial indicators of an entity’s ability to generate profits. Financial analysts have designed various profitability ratios which are aimed to look at the profitability of entities from different angles, for e.g., comparison of profits and revenue gives insights about the costs. Comparison of profits with assets or capital employed gives insights about the efficient or inefficient utilization of resources etc.
As with majority of financial ratios, profitability ratios are also not very helpful when viewed in isolation. These are best used by comparing these ratios over different periods (trend analysis) or comparing these ratios with the ratios of competitors or industry average (Industry comparisons).
List of all commonly used profitability ratios.
- Gross profit margin
- Operating profit margin
- EBITDA margin (Earnings before interest, tax, depreciation and amortization)
- Net profit margin
- Cost to sales ratio
- Return on capital employed (ROCE)
- Return on assets
- Return on equity
- Earnings per share
All profitability ratios summarized in one article
Following is a summary of all profitability ratio. It explains the formulas, meanings and evaluation criteria (performance benchmark) of profitability ratios. For detailed explanation of each ratio, please go the the respective links in the above list.