Profitability Ratios

Profitability ratios measure a company’s ability to generate profit relative to equity, assets or revenue. Key ratios include return on equity (ROE), return on assets (ROA), and return on sales (ROS). Additionally gross profit margin, and net profit margin are also considered in profitability ratios. Together these ratios help assess financial performance, efficiency, and competitiveness. Higher values typically indicate better profitability and financial health.

The definition of these ratios are:

Return on Equity (ROE)
ROE = (Net Income / Shareholders’ Equity) * 100
This ratio measures how efficiently a company generates profit from shareholder’s investments. The higher the ROE, the better returns for investors.

Return on Assets (ROA)
ROA = (Net Income / Total Assets​) * 100
This ratio evaluates how effectively a company uses its assets to generate profit. Higher ROA means the company is utilizing its assets efficiently.

Return on Sales (ROS)
ROS = (Operating Profit / Revenue) * 100
This ratio assesses how much profit a company makes from its revenues after operating assets. The higher the number translates to higher profit per dollar of revenue.

Gross Profit Margin
Gross Profit Margin = Gross Profit / Revenue​
Indicates how efficiently a company produces goods/services.

Net Profit Margin
Net Profit Margin = Net Income / Revenue
Shows the percentage of revenue remaining after all expenses.