Which of the following is considered a profitability measure?
The return on asset (ROA) is one measure that is used by companies in order to know how profitable is the...
Profitability ratios measure a company's ability to earn a profit relative to its sales revenue, operating costs, balance sheet assets, and shareholders' equity. These financial metrics can also show how well companies use their existing assets to generate profit and value for owners and shareholders.
Therefore, the Operating ratio is not an example of profitability ratios.
Profitability ratios determine the ability of the company to generate profits as against : (i) Sales, (ii) Operating Costs, (iii) Assets and (iv) Shareholder's Equity.
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Types of Profitability Ratio
- Gross Profit Ratio.
- Operating Ratio.
- Operating Profit Ratio.
- Net Profit Ratio.
- Return on Investment.
Some common examples of profitability ratios are the various measures of profit margin, return on assets (ROA), and return on equity (ROE). Others include return on invested capital (ROIC) and return on capital employed (ROCE).
The profitability ratios include the: (1) Operating margin, (2) Profit margin, (3) Return on total assets (ROA), (4) Basic earning power (BEP), (5) Return on invested capital (ROIC), and (6) Return on common equity (ROE).
A good metric for evaluating profitability is net margin, the ratio of net profits to total revenues. 3 It is crucial to consider the net margin ratio because a simple dollar figure of profit is inadequate to assess the company's financial health.
A good metric for evaluating profitability is net margin, the ratio of net profits to total revenues. 3 It is crucial to consider the net margin ratio because a simple dollar figure of profit is inadequate to assess the company's financial health.
- Step 1: Calculate Break-Even. Break-even analysis should be performed first. ...
- Step 2: Ratio Analysis. Using the ratios identified above, begin generating current profit ratios and return ratios for the period. ...
- Step 3: Compare To Industry Standards.
