DEFINITION of 'Profitability Ratios'
A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
INVESTOPEDIA EXPLAINS 'Profitability Ratios'
Some examples of profitability ratios are profit margin, return on assets and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.
For instance, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season. Therefore, it would not be too useful to compare a retailer's fourthquarter profit margin with its firstquarter profit margin. On the other hand, comparing a retailer's fourthquarter profit margin with the profit margin from the same period a year before would be far more informative.
Profitability ratios are the most popular metrics used in financial analysis. Read the short guide on Profitability Indicator Ratios: Introduction.
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Return On Equity  ROE
The amount of net income returned as a percentage of shareholders ... 
Earnings Per Share  EPS
The portion of a company's profit allocated to each outstanding ... 
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A performance measure used to evaluate the efficiency of an investment ... 
Profitability Index Rule
A regulation for evaluating whether to proceed with a project ... 
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What advantages does EBTIDAmargin have over other profitability ratios?
The advantages that EBITDA margin has over other profitability ratios is that it measures a company's financial performance ... Read Full Answer >> 
What are some ways a company can improve on its Return on Capital Employed (ROCE)?
Options available to a company seeking to improve on its return on capital employed (ROCE) ratio include reducing costs, ... Read Full Answer >> 
If a company has a high debt to capital ratio, what else should I look at before ...
A variety of equity valuation metrics can be utilized to evaluate a company along with the debt to capital ratio to get a ... Read Full Answer >> 
What is considered a healthy operating profit margin?
Generally speaking, an operating profit margin of approximately 25% or better is considered favorable by most market analysts. ... Read Full Answer >> 
What is the difference between efficiency ratios and profitability ratios?
Efficiency ratios and profitability ratios are tools used in fundamental analysis. These ratios help investors with their ... Read Full Answer >> 
Why do shareholders need financial statements?
Shareholders need financial statements to evaluate their equity investments and help them make informed decisions as to how ... Read Full Answer >> 
Over what sort of time span should I be examining a company's EBITA margin?
As with all profitability ratios, a company's earnings before interest, taxes, depreciation and amortization (EBITDA) margin ... Read Full Answer >> 
Why does operating profit exclude interest revenues and expenses?
Interest revenues and expenses are not used when calculating operating profit margin because of what the metric is designed ... Read Full Answer >> 
What is the best timeframe to use when evaluating return on sales (ROS)?
The return on sales, or ROS, ratio is best viewed on a yeartoyear basis and examined for trends over a period of time. ... Read Full Answer >> 
What's the difference between an income statement and a balance sheet approach?
The three main financial statements regularly produced by publicly traded companies are the income statement, balance sheet ... Read Full Answer >> 
What is more important for a business, profitability or growth?
To be successful and remain in business, both profitability and growth are important and necessary for a company to survive ... Read Full Answer >>

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