Profitability Ratios

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.

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  • Accounts Receivables Turnover
    The accounts receivables turnover is a calculation to measure how successful a company is in collecting money owed to them from customers.
  • Accrual Principle
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  • Accumulated Depreciation to Fixed Assets Ratio
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  • Adjusted Gross Income
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  • Adjusted Trial Balance
    An adjusted trial balance is a report in which all debit and credit company accounts are listed as they will appear on the financial statements after making adjusting entries.
  • Adjusting Entries
    Adjusting entries are journal entries (which is why they are sometimes called adjusting journal entries) that are made at the end of the financial reporting period to correct the accounts for the preparation of financial statements.
  • Annual Income
    Definition: Income is money (or some equivalent value) that an individual or business gets, usually in exchange through investing capital or providing a good or service.
  • Annual Percentage Yield
    The annual percentage yield (APY) helps a business or investor to understand how much they are earning from the money they have invested with compounded interest.
  • Annuity Payment
    An annuity is a financial product that pays out a series of cash flows at a specified frequency and over a fixed time period.
  • Annuity Payment from Future Value (FV)
    Annuity payment from future value is a formula that helps one to determine the value of cash flows in an annuity when the future value of the annuity is known.
  • Asset Accounts
    An asset account is a category within a company’s general ledger account that shows the value of the assets it owns.
  • Asset Coverage Ratio
    The asset coverage ratio determines a company’s capacity to pay its debt through its assets.
  • Asset Purchase
    When a business undertakes an asset purchase, in reality, it just taking this approach to structure the acquisition of a company.
  • Asset Purchase Agreement
    Asset purchase refers to the process involved in the buying of a company’s assets.
  • Asset Turnover
    The asset turnover ratio is a way to measure the value of a company’s sales compared to the value of the company’s assets.
  • AVCO Method
    The Average Cost Method, also commonly referred to as the AVCO method, is a method used to find the average cost of items recorded in an inventory.
  • Average Collection Period
    The average collection period is an estimation of the average time period needed for a business to receive payment for money owed to them.
  • Average Inventory Period
    Average inventory period refers to a financial ratio used to compute the average number of days a company takes before they sell all their current stock of inventory.
  • Average Payment Period (APP)
    Average payment period (APP) is a metric that allows a business to see how long it takes on average to pay its vendors.
  • Balance Sheet
    The balance sheet is one of the general-purpose financial statements prepared during the accounting cycle.
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  • Book Value Per Share
    Book value per share (BVPS) is the minimum cash value of a company and its equity.
  • Break-Even Point Analysis
    Break-even point analysis examines how much a company can safely stand to lose before descending below its break-even point.
  • Break-Even Point Analysis Excel Template
    Break-even point analysis examines how much a company can safely stand to lose before descending below its break-even point.
  • Budget
    A budget is a formal statement of estimated revenue and expenses over a specific period in the future, based on their objectives.
  • Business Entity Concept
    The business entity assumption is an accounting principle that makes a legal distinction between the transactions carried out by a business and the transactions of the owner.
  • Business Events
    A business event is a business transaction in which there is an exchange of value between two groups.
  • Business Owner
    A business owner is an individual or an entity who owns and operates a business.
  • Capital Asset Pricing Model
    The Capital Asset Pricing Model (CAPM) provides a way to calculate the expected return of an investment based on the time value of money and the systematic risk of the asset.
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  • Capital Budgeting
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  • Capital Gains Yield
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  • Capital Intensity Ratio
    Capital intensity ratio (CIR) is a metric that shows you how much capital is needed to generate $1 of revenue.
  • Capital Lease Accounting
    Capital lease accounting refers to the accounting treatment of assets leased by a business under a capital lease agreement.
  • Capital Resources
    Capital resources are the man-made assets employed in the manufacturing of further goods.
  • Capitalization Ratio
    The 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 Conversion Cycle (CCC)
    The cash conversion cycle (CCC) is a measure of time indicated in days needed to convert inventory investments and other resources into sales-derived cash flow.
  • 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 Flow Adequacy Ratio
    The cash flow adequacy ratio is used to determine if the cash flow generated by a company is sufficient to pay for its ongoing expenses—for example, reductions in long-term debt, acquisition of fixed assets or paying dividends to shareholders.
  • Cash Flow Coverage Ratio
    The cash flow coverage ratio represents the relationship between a company’s operating cash flow and its total debt.
  • Cash Flow Statement – Direct Method
    A statement of cash flows can be prepared by either using a direct method or an indirect method.
  • Cash Flow Statement – Indirect Method
    A statement of cash flows can be prepared by either using a direct method or an indirect method.
  • Cash Flow to Debt Ratio
    The cash flow to debt ratio is a coverage ratio that reflects the relationship between a company’s operational cash flow and its total debt.
  • Cash Flow to Sales Ratio
    Cash Flow to Sales Ratio is a performance metric that represents a business’s operating cash flow once all capital expenditures related to sales have been deducted.
  • Cash Ratio
    The cash ratio (also known as the cash coverage ratio) is a measurement of how well can the company pay its short-term debt in the form of cash and cash equivalent (investment items that immediately available to be turned into cash e.
  • Cash Reinvestment Ratio
    The cash reinvestment ratio, also known as the cash flow reinvestment ratio, is a valuation ratio used to measure the percentage of annual cash flow that the company invests back into the business as a new investment.
  • Cash Return On Assets Ratio
    The cash return on assets (cash ROA) ratio is a measure of the operational cash flow against the total assets owned by a business.
  • Cash Sales
    A cash sale is a business transaction in which the buyer pays for goods or services at the time of the purchase.
  • Cash to Current Assets Ratio
    Cash to current assets is a liquidity ratio that measures how much of the current assets in a company are made up of cash and cash equivalents.
  • Cash to Current Liabilities Ratio
    Cash to current liabilities ratio, also known as the cash ratio, is a cash flow measure that compares the firm’s most liquid assets to its short-term obligations.
  • Cash to Working Capital Ratio
    The cash to working capital ratio measures what percentage of the company’s working capital is made up of cash and cash equivalents such as marketable securities.
  • 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.
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    The chart of accounts refers to the directory of every account made in the general ledger in an accounting system.
  • Classified Balance Sheet
    A classified balance sheet is a financial statement that reports the assets, liabilities and equity of a company.
  • Closing Entries
    Closing entries are manual journal entries at the end of an accounting cycle to close out all the temporary accounts and shift their balances to permanent accounts.
  • Competition
    Definition of Competition Competition is a situation in which someone is trying to win something or be more successful than someone else.
  • Completed Contract Method
    Reporting income or expenses can be postponed using an accounting technique known as the complete contract method.
  • Compound Annual Growth Rate (CAGR)
    Compound annual growth rate (CAGR) is the metric that allows an investor to compare the return rates of their investments over a given time period.
  • Conservatism Principle
    The conservatism or prudence principle in accounting is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty.
  • Consistency Principle
    The consistency principle states that once a company adopts a certain accounting policy or method, it must be applied consistently in the future as well.
  • Consumption
    Consumption flow and expenditure can be crucial to understand the fluctuations in the different business cycles.
  • Continuous Compounding
    Continuous compounding is the mathematical limit reached by compound interest when it’s calculated and reinvested to an account balance over a theoretically endless number of periods.
  • Contra Accounts
    A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with.
  • Contract for Difference (CFD)
    A contract for difference, often abbreviated to CFD, is an alternative means by which an individual can invest in a company or asset.
  • Contribution Margin
    The contribution margin measures the difference between the sales price of a product and the variable costs per unit.
  • Corporation
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  • Correlation Coefficient
    The correlation coefficient, also called the Pearson correlation, is a metric that reflects the relationship between two numbers.
  • Cost Benefit Principle
    The cost benefit principle states that the cost of providing the information in the financial statements should not exceed the benefits that the users get from reading those statements.
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  • Cost of Goods Manufactured (COGM) Excel Template
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  • 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.
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  • Credit Sales
    A credit sale is a type of transaction where the buyer delays payment to a later date.
  • Crossover Rate
    Crossover rate is the cost of capital where two projects have the same net present values (NPV) or where their NPV profiles intersect.
  • Current Ratio
    Current ratio determines the ability of a company or business to clear its short-term debts using its current assets.
  • Current Yield
    The current yield is the return that an investor would receive, based on a current rate.
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  • Days Cash on Hand
    Days cash on hand is the number of days a company can keep up with its operating expenses using the cash available in the business.
  • Days Payable Outstanding (DPO)
    Days payable outstanding (DPO) is a ratio measuring the average time a company takes to pay its invoices & bills to suppliers and vendors.
  • Days Sales in Inventory (DSI)
    Days sales in inventory (DSI) refers to a financial ratio showing the number of days a company takes to turn over all its inventory.