What are profitability ratios?
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Profitability ratios measure how profitable a company is and are used to assess its performance and efficiency. Based on the income statement and balance sheet of a company, these ratios are calculated.
In terms of profitability ratios, there are several types, each providing a different viewpoint.
The following are some common profitability ratios:
Gross profit margin: This ratio measures the percentage of revenue that remains after the cost of goods sold has been deducted. Producing and selling efficiently is indicated by this metric.
Net profit margin: An organization’s net profit margin is the portion of revenue left after all expenses have been deducted. A company’s profitability is measured by this indicator.
Return on assets (ROA): This ratio measures how profitable a company’s assets are. In other words, it indicates how effectively a company generates profits from its assets.
Return on equity (ROE): This ratio measures the profitability of a company’s equity. It shows how effectively a company generates profits from its shareholders’ investments.
Analysts and investors use profitability ratios to evaluate a company’s performance and profitability ability.
An investor or analyst can evaluate a company’s relative strength and identify potential opportunities or risks by comparing its profitability ratios with its peers or its industry averages.