Profitability Ratios

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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.

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BREAKING DOWN '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.

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RELATED FAQS
  1. What factors make it difficult to compare performance ratios between retail stocks?

    Companies that operate in the retail sector significantly differ in terms of their profitability and efficiency, making stock ... Read Full Answer >>
  2. What annual return could an investor expect on average from the drug sector?

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  3. What metrics can be used to evaluate companies in the automotive sector?

    Primary equity evaluation metrics used by analysts and investors to evaluate companies in the automotive sector include those ... Read Full Answer >>
  4. What level of return on equity is average for a company in the telecommunications ...

    The telecommunications sector encompasses a wide variety of companies operating in different industries such as wireless ... Read Full Answer >>
  5. To what extent will changing fuel costs affect the profitability of the airline industry?

    Fuel costs represent one of the biggest expenses for the aerospace and airline industries. On average, fuel costs account ... Read Full Answer >>
  6. Which stocks in the wholesale sector pay the highest dividends?

    The wholesale sector consists of a diverse group of companies that operate in industries including auto parts, industrial ... Read Full Answer >>
  7. What advantages does EBTIDA-margin 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 >>
  8. 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 >>
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    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 >>
  10. 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 >>
  11. What is the difference between efficiency ratios and profitability ratios?

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    Shareholders need financial statements to evaluate their equity investments and help them make informed decisions as to how ... Read Full Answer >>
  13. 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 >>
  14. 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 >>
  15. 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 year-to-year basis and examined for trends over a period of time. ... Read Full Answer >>
  16. What's the difference between an income statement and a balance sheet approach?

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