Profitability Ratios

Concept

Measuring Earnings Performance

Profitability ratios evaluate how effectively a company generates profit. Gross Profit Margin = Gross Profit / Net Sales. Net Profit Margin = Net Income / Net Sales. Return on Assets (ROA) = Net Income / Average Total Assets. Return on Equity (ROE) = Net Income / Average Stockholders' Equity.

Example

Calculating Profitability

Net Sales: $500,000 | COGS: $300,000 | Net Income: $50,000 Avg Total Assets: $400,000 | Avg Equity: $250,000 Gross Margin = $200,000 / $500,000 = 40% Net Margin = $50,000 / $500,000 = 10% ROA = $50,000 / $400,000 = 12.5% ROE = $50,000 / $250,000 = 20%

Key Point

DuPont Analysis

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier. This decomposition reveals whether profitability comes from margins, efficiency, or leverage.

Liquidity Ratios

Solvency Ratios

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