Profitability Ratios

AAA

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 fourth-quarter profit margin with its first-quarter profit margin. On the other hand, comparing a retailer's fourth-quarter 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.

RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  3. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  4. Profitability Index Rule

    A regulation for evaluating whether to proceed with a project ...
  5. Cash Return On Assets Ratio

    A ratio used to compare a businesses performance among other ...
  6. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating ...
Related Articles
  1. FYI On ROI: A Guide To Calculating Return ...
    Active Trading

    FYI On ROI: A Guide To Calculating Return ...

  2. ROA And ROE Give Clear Picture Of Corporate ...
    Markets

    ROA And ROE Give Clear Picture Of Corporate ...

  3. The 5 Types Of Earnings Per Share
    Markets

    The 5 Types Of Earnings Per Share

  4. A Look At Corporate Profit Margins
    Markets

    A Look At Corporate Profit Margins

comments powered by Disqus
Hot Definitions
  1. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  3. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center