Profitability Ratios/Return on Assets/Return on Equity/Gross Profit Margin/Operating Profit Margin

How Profitability ratios are calculated and interpreted are justified here. Ratio analysis is a great way to compare two companies that are different in size operations and management style. It also is a great way to quantify how efficient a company’s operations are and how profitable the business is set up to be. Solvency ratios, for example, can be used to analyze how well a company will be able to meet their financial obligations.
Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period. They show how well a company utilizes its assets to produce profit and value to shareholders.
Return ratios represent the company’s ability to generate returns for its shareholders. It typically compares a return metric versus certain balance sheet items. Return on Equity, Return on Assets and Return on Capital Employed. Margin ratios represent the company’s ability to convert sales into profits at various degrees of measurement. Margin ratios typically look at certain returns when compared to the top line (revenue). Typically, it compares income statement items. Gross Margin Ratio, Operating Profit Margin and Net Profit Margin
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