Reading: Profitability Ratios
Profitability
Ratio
•Profitability
ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings 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 relative to the same ratio
from a previous period indicates that the company is doing well.
Profit
Margin
•Profit
margin is a profitability ratio calculated as net income divided by revenue, or
net profits divided by sales. Net income or net profit may be determined by
subtracting all of a company’s expenses, including operating costs, material
costs (including raw materials) and tax costs, from its total revenue. Profit
margins are expressed as a percentage and, in effect, measure how much out of
every dollar of sales a company actually keeps in earnings. A 20% profit
margin, then, means the company has a net income of $0.20 for each dollar of
total revenue earned.
Net
Income = $30,000
Net Sales = $100,000
Profit Margin = $30,000
$100,000
Profit Margin = 30%
Net Sales = $100,000
Profit Margin = $30,000
$100,000
Profit Margin = 30%
Return
on Assets
•Return
on assets (ROA) is an indicator of how profitable a company is relative to its
total assets. ROA gives a manager, investor, or analyst an idea as to how
efficient a company's management is at using its assets to generate earnings.
Net
Income = $100,000
Total Assets = $500,000
ROA = $100,000
$500,000
ROA = 20%
Total Assets = $500,000
ROA = $100,000
$500,000
ROA = 20%
Return
on Equity
•Return
on equity (ROE) is the amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have
invested.
Net
Income = $10,000
Shareholder’s Equity = $20,000
ROE = $10,000
$20,000
ROE = 50%
Shareholder’s Equity = $20,000
ROE = $10,000
$20,000
ROE = 50%
Остання зміна: вівторок 14 серпня 2018 08:39 AM