Profitability ratio - Financial definition
Concise definition of the term profitability ratio
A profitability ratio is a financial metric that measures a company's ability to generate profits and earnings from its operations. It assesses the company's profitability and efficiency in utilizing its resources to generate income.
Comprehensive definition of the term profitability ratio
Profitability ratios provide insights into a company's financial performance and are important indicators for investors (shareholders), creditors, and management.
Common profitability ratios include:
- Gross Profit Margin: This ratio measures the percentage of revenue that exceeds the cost of goods sold. It reflects a company's ability to produce goods or services profitably.
- Operating Profit Margin: It assesses a company's operating efficiency by comparing operating profit to revenue. It reflects how well the company manages its core operations.
- Net Profit Margin: This ratio indicates a company's overall profitability by comparing net income to revenue. It takes into account all costs, including taxes and interest expenses.
- Return on Assets (ROA): ROA measures a company's ability to generate profit from its assets. It shows how efficiently a company utilizes its assets to generate income.
- Return on Equity (ROE): ROE assesses how well a company generates profit relative to shareholders' equity. It reflects the return on the owners' investment.
- Earnings Per Share (EPS): EPS represents the portion of a company's profit attributed to each outstanding share of common stock. It is crucial for investors to assess a company's profitability on a per-share basis.