What are Profitability Ratios?

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

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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