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 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)
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