Profitability Ratios

Profitability Ratios are a type of accounting ratio that helps determine a business' financial performance at the end of an accounting period. Profitability ratios show how well a company can make profits from its operations. These ratios constitute the key metrics used to assess a company's financial performance. These ratios are largely classified into the Margin Ratios, the Return on Investment (ROI) Ratios, the Efficiency Ratio and Other Ratios.

Margin Ratios

Measure the profitability of a company's business. It calculates the percentage of revenue that remains as profit after deducting various expenses. Examples of Margin Ratios are:

• Net Margin: Measures a company's overall profitability after considering all expenses.
• Gross Profit Margin: Indicates the percentage of revenue left after deducting the cost of goods sold.
• Operating Profit Margin: Shows the profitability of a company's core operations, excluding non-operating income and expenses.

Return on Investment (ROI) Ratios

These ratios help assess how efficiently a company uses its resources to generate profits. It places side by side the profits made from the business and the resources invested. Some examples of ROI Ratios are:

• Return on Capital Employed (ROCE): it measures the profitability of a company's investments in assets.
• Return on Assets (ROA): This is used to evaluate how efficiently a company uses its assets to generate profits.
• Return on Equity (ROE): Indicates the return generated for shareholders based on their investment in equity in the company.

Efficiency Ratios

Efficiency Ratios evaluate how effectively a company is using its assets to generate sales or carry out its business. It measures the turnover of assets and how efficiently they are utilized.

• Net Asset Turnover: Measures how effectively a company uses its assets to generate sales or carry out its business.
• Operating Asset Turnover: Assesses the efficiency of a company's operating assets in helping to carry on its operations/business.

Other Ratios

• EBITDA/Capital Employed: Compares earnings before interest, taxes, depreciation, and amortization to the capital employed.
• Return on Investment (ROI): Measures the profitability of a specific investment.