Evaluate how profitable any company is
Download the free financial ratio ebook and find out which six ratios to use to evaluate the profitability of any business.
Profitability ratios are used to measure the ability of a company to generate earnings (profit) relative to the resources. In this section, we cover the most important profitability ratios you need to know.
What are profitability ratios?
Profitability ratios are a set of measurements indicating the capability of a company to generate profit relative to the resources used. The main goal of profitability ratios is to gauge how effective a company is in using its assets to produce an optimal return.
Profitability ratios are further divided into two categories: return ratios and margin ratios. Return ratios often compare net income or other similar variables (return) with assets, equity, debt, or other indicators. These ratios are mainly useful to estimate the proportion of potential return investors can get.
Meanwhile, margin ratios measure the level of profit at numerous degrees of calculations, some examples are earnings before interest and taxes (EBIT), net income, and net income margin. You can take advantage of these measurements to get a general feel of which kind of resources used to generate sales and how much of them are used.
List of profitability ratios
Below is the complete list of profitability ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.
They also explain the formula behind the ratio and provide examples and analysis to help you understand them.
- Break-Even Point AnalysisBreak-even point analysis examines how much a company can safely stand to lose before descending below its break-even point.
- Capital Gains YieldA capital gains yield is the rise in the price of a security, like common stock, over a given period of time.
- Capitalization RatioThe capitalization ratio, also referred to as the cap ratio, is an indicator that measures the ratio between a company’s debts within its capital structure—the combination of debts and equities.
- Cash Earnings Per Share (Cash EPS)Cash earnings per share (Cash EPS) is a profitability ratio that compares a company’s cash flow against their volume of shares outstanding.
- Cash Return On Assets RatioThe cash return on assets (cash ROA) ratio is a measure of the operational cash flow against the total assets owned by a business.
- Cash Turnover Ratio (CTR)The cash turnover ratio (CTR) a profitability and efficiency ratio that measures how many times a company uses its cash to generate revenues.
- Contribution MarginThe contribution margin measures the difference between the sales price of a product and the variable costs per unit.
- Cost of Goods Sold (COGS)Cost of goods sold (COGS) is the total value of direct costs related to producing goods sold by a business.
- DuPont AnalysisThe DuPont analysis, named after a financial model created by the chemical manufacturer, DuPont Corporation, is a financial framework driven by the return on equity (ROE) ratio.
- Earnings Before Interest and Taxes (EBIT)EBIT (earnings before interest and taxes), also referred to as operating income, is a profitability ratio that determines the operating profits of a company by deducting of the cost of goods sold and operating from the total revenue.
- Earnings Before Interest, Taxes and Amortization (EBITA)Earnings before interest, taxes and amortization (EBITA) is an efficiency measurement of company profitability commonly used by investors.
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a metric used to measure a company’s financial performance and is often an alternative to simple earnings or net income.
- Earnings Per ShareEarnings per share is a profitability ratio that determines the net earnings of each share of stock in a company outstanding at the end of a given year.
- Expense RatioThe expense ratio is a way for a potential investor to quickly see how effectively an investment portfolio is being run.
- Goodwill to Assets RatioGoodwill to assets ratio compares the value of a business’ goodwill to its total asset value.
- Gross Margin RatioGross margin ratio is an economic term that refers to the ratio between a company’s gross profit to net sales.
- Gross Profit MarginGross profit margin is a profitability ratio that determines the difference between the total sales of a company and the cost of goods sold.
- Margin of Safety (MOS)The term “margin of safety” is used in multiple contexts.
- Marginal RevenueMarginal revenue refers to the increase in revenue realized from the sale of an additional one unit of output.
- Net Interest Margin (NIM)The net interest margin (NIM) measures a company’s profit from its investments with respect to its total investing assets.
- Net Operating Income (NOI)Net operating income (NOI) is a term often used in real estate accounting that refers to the formula for the profitability of a commercial property.
- Net Operating Profit After Tax (NOPAT)Net operating profit after tax (NOPAT) is a profit measurement that indicates how much profit a company generates by looking at its operating income minus taxes.
- Net Present Value (NPV)Net present value (NPV) is the difference between the present value of cash inflows and outflows of an investment over a period of time.
- Net Profit MarginNet profit margin is the percentage of actual income that remains from its total revenue after expenses are subtracted.
- Operating Cash Flow MarginOperating cash flow margin is a profitability ratio that is used to measure the amount of cash made from operating activities of a company as a percentage of net sales in a given period.
- Operating IncomeOperating income is the amount of profit made from a company’s business operations after accounting for operating expenses.
- Operating Leverage (DOL)Operating leverage, also known as the degree of operating leverage (DOL) determines the extent to which a company can raise its operating revenue by increasing its income.
- Operating Margin RatioThe operating margin ratio is a profitability ratio that indicates how much profit a company makes from its operations before taxes and interest are deducted.
- Profit MarginThe profit margin ratio, also referred to as return on sales ratio or gross profit ratio, is a profitability ratio that determines the percentage of a company’s sales that has been turned into profit.
- Return On Assets (ROA)Return on assets (ROA) is a measurement of how profitable a business is compared to its assets.
- Return On Average Equity RatioReturn on average equity is a profitability ratio that measures the amount of net income compared to the average shareholders’ equity of a company.
- Return on Capital Employed (ROCE)Return on capital employed (ROCE) is a profitability metric that indicates a company’s efficiency in earning profits from its capital employed with respect to its net operating profit.
- Return on Debt Ratio (ROD)Return on debt ratio is one of the profitability ratios measuring the net profit generated by a company relative to its debt.
- Return On EquityThe return on equity (ROE) is a measurement of how well a company is performing from the shareholder’s perspective over a period of time.
- Return on Invested Capital (ROIC)Return on invested capital, or ROIC, is a measurement of a company’s profitability using shareholders’ money.
- Return On Investment (ROI)A return on investment (ROI) is an evaluation of how profitable an investment is compared to its initial cost.
- Return on Net AssetsReturn on net assets (RONA) measures the net profit of a company, divided by net assets.
- Return on Research Capital (RORC)Return on research capital (RORC) is a metric that describes the revenue generated by a company as a result of capital spent on research and development.
- Return on Retained Earnings (RORE)Return on retained earnings (RORE) is a ratio that shows how much a company earns those who own shares in the company (shareholders) by reinvesting the profits back into the company.
- Return On Revenue (ROR)The return on revenue (ROR) ratio is a measure of company profitability based on its revenue.
- Return On SalesReturn on sales (ROS) is a ratio that you can use to evaluate a company’s operational efficiency.