Profitability ratios are crucial financial metrics that help assess a company's ability to generate earnings relative to revenue, operating costs, assets, and shareholders' equity.
Measures the percentage of revenue remaining after accounting for the cost of goods sold (COGS).
Gross Profit Margin = (Revenue - COGS) / Revenue × 100%
Higher margins indicate better efficiency in converting raw materials into income. Industry averages vary significantly:
Shows the percentage of revenue that translates into actual profit after all expenses.
Net Profit Margin = Net Income / Revenue × 100%
Reflects overall profitability and operational efficiency. Typical ranges:
Measures the return generated on shareholders' investment.
ROE = Net Income / Shareholders' Equity × 100%
Indicates efficiency in using equity to generate profits. Benchmarks:
Indicates how efficiently a company uses its assets to generate profits.
ROA = Net Income / Total Assets × 100%
Shows asset utilization efficiency. General guidelines:
Profitability ratios are essential because they:
Companies typically calculate profitability ratios:
Target ranges vary significantly by industry, company size, and market conditions. However, general guidelines include:
