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Profitability Ratios - Explained

What are Profitability Ratios?

Written by Jason Gordon

Updated at April 7th, 2022

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Table of Contents

What are Profitability Ratios?Gross Margin RatioProfit Margin RatioReturn on AssetsReturn on Shareholder's EquityEarnings Per Share

What are Profitability Ratios?

Profitability Ratios are used to determine how profitable is a given company as compared to a different company. 

Back to: Accounting & Taxation

The most common ratios used for this comparison include: 

Gross Margin Ratio

Gross margin ratio = Gross margin / Net sales

Indicates the gross margin generated for each dollar in net sales. 

Profit Margin Ratio

Profit margin ratio = Net income / Net sales

Indicates the profit generated for each dollar in net sales. 

Return on Assets

Return on assets = Net income / Average total assets

Indicates how much net income was generated from each dollar in average assets invested.

Return on Shareholder's Equity

Return on common shareholders’ equity = (Net income − Preferred dividends) /Average common shareholders’ equity. 

Indicates how much net income was generated from each dollar of common shareholders’ equity.

Earnings Per Share

Earnings per share = Net income − Preferred dividends / Weighted average common shares outstanding. 

Indicates how much net income was earned for each share of common stock outstanding.

Related Topics

  • Trend Analysis of Financial Statements
  • Common-Size Analysis (Vertical Analysis) of Financial Statements
  • Common-Size Financial Statement
  • Net Dollar Retention
  • Horizontal Analysis
  • Per Share Basis
  • Profitability Ratios
  • Gross Margin Ratio
  • Profit Margin
  • After Tax Profit Margin
  • Return on Assets
  • Total Shareholder Return
  • Cash on Cash Return
  • Earnings Per Share
  • Diluted Earnings Per Share
  • Asset Turnover Ratio
  • Berry Ratio
  • Break-Even Analysis
  • Liquidity Ratio
  • Current ratio  (Working Capital Ratio)
  • Working Ratio
  • Quick Ratio
  • Quick Assets
  • Days Sales Outstanding
  • Cash Ratio (Operating Cash Flow Ratio)
  • Receivables turnover ratio (often converted to average collection period)
  • Accounts Payable Turnover Ratio
  • Inventory turnover ratio (often converted to average sale period)
  • Solvency (Coverage Ratios)
  • Leverage Ratio (Debt Ratio)
  • Asset Coverage Ratio
  • Debt to Equity
  • Debt to Income Ratio
  • Debt Coverage Ratio
  • Times Interest Earned
  • Market Capitalization
  • Price to Equity Ratio
  • Book-To-Market Ratio
  • Price to Earnings Ratio
  • Price to Earnings Growth (PEG) Ratio
  • Price to Earnings Growth Payback Ratio
  • CAPE Ratio
  • Price to Cash Flow Ratio
  • Capital Maintenance
  • Book to Bill Ratio
  • Asset Turnover Ratio
  • Plowback Ratio 
  • Days Inventory Outstanding
  • Days Payable Outstanding
  • Days Sales Outstanding
  • Non-financial Performance Measures: The Balance Scorecard
profitability ratio profitability ratios profit ratio profit ratios

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