Profitability Ratios are used to measure your company’s ability to generate income. This demonstrates how well a company manages its assets to produce a profit. There are up to six Profitability Ratios we may want to use to measure your company’s profits and they are broken up into two sections.

**Return Ratios**

**Return on Equity** is a simple formula to determine returns. When you use this metric to compare it to others in the same industry it’s possible to pinpoint a company’s advantage.

- ROE = Net Income / Shareholder’s Equity

**Return on Assets** measures the profitability of a business in relation to its total assets. The higher the return, the more productive and efficient the management. This is best suited for comparing different periods on the financial statements.

- ROA = Net Income / Net Assets

**Return on Capital Employed** measures how efficient a company is in using its capital to generate profits. This is one of the best profitability ratios and is commonly used to determine whether a company is suitable to invest in

- ROCE = Earnings Before Interest and Taxes (EBIT) / (Total Assets – Current Liabilities)

**Margin Ratios**

**Gross Profit Margin** compares Gross Margin to Revenue. It shows how much profit a company makes after pay its Cost of Goods Sold. The percentage is an indication of each dollar of it retains as Gross Profit.

- Gross Profit Margin = (Total Revenue – Cost of Goods Sold) / Total Revenue

**Operating Profit Margin** calculates the percentage of profit a company produces from its operations.

- Operating Profit Margin = (Total Revenue – Cost of Goods Sold – Operating Expenses – Depreciation and Amortization) / Total Revenue

**Net Profit Margin** calculates the percentage of profit a company produces from its total revenue. It’s the Net Profit a company obtains per dollar of revenue gained.

- Net Profit Margin = Net Income / Total Revenue