profitability ratio

(noun)

measurements of the firm's use of its assets and control of its expenses to generate an acceptable rate of return

Related Terms

Examples of profitability ratio in the following topics:

  • Profit Margin

    • Profit margin is one of the most used profitability ratios.
    • The profit margin ratio is broadly the ratio of profit to total sales times 100%.
    • Net profit is the gross profit minus all other expenses.
    • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
    • It is difficult to accurately compare the net profit ratio for different entities.

  • Basic Earning Power (BEP) Ratio

    • The Basic Earning Power ratio (BEP) is Earnings Before Interest and Taxes (EBIT) divided by Total Assets.
    • Another profitability ratio is the Basic Earning Power ratio (BEP).
    • The BEP ratio is simply EBIT divided by total assets .
    • BEP, like all profitability ratios, does not provide a complete picture of which company is better or more attractive to investors.
    • BEP is calculated as the ratio of Earnings Before Interest and Taxes to Total Assets.

  • Classification

    • Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
    • Financial statement analysis is the process of understanding the risk and profitability of a firm through analysis of reported financial information.
    • Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.
    • Activity ratios, also called efficiency ratios, measure the effectiveness of a firm's use of resources, or assets.
    • Market ratios are concerned with shareholder audiences.

  • Ratio Analysis and EPS

    • Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.
    • Gross margin, Gross profit margin or Gross Profit Rate: Gross profit / Net sales
    • Profit margin, net margin or net profit margin: Net profit / Net sales
    • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
    • Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios

  • Return on Total Assets

    • The return on assets ratio (ROA) measures how effectively assets are being used for generating profit.
    • It is also a measure of how much the company relies on assets to generate profit.
    • The ROA is the product of two other common ratios - profit margin and asset turnover.
    • When profit margin and asset turnover are multiplied together, the denominator of profit margin and the numerator of asset turnover cancel each other out, returning us to the original ratio of net income to total assets.
    • Profit margin is net income divided by sales, measuring the percent of each dollar in sales that is profit for the company.

  • Operating Margin

    • The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue.
    • If a company doesn't earn a profit, their revenues aren't helping the company grow.
    • The operating margin (also called the operating profit margin or return on sales) is a ratio that shines a light on how much money a company is actually making in profit.
    • The higher the ratio is, the more profitable the company is from its operations.
    • The operating margin is a useful tool for determining how profitable the operations of a company are, but not necessarily how profitable the company is as a whole.

  • Selected Financial Ratios and Analyses

    • Financial ratios and their analysis provide information on a firm's profitability and allow comparisons between the firm and its industry.
    • Analyzing a company's financial statements allows interested parties (investors, creditors and company management) to get an overall picture of the financial condition and profitability of a company.
    • Ratios can identify various financial attributes of a company, such as solvency and liquidity, profitability (quality of income), and return on equity.
    • For example, financial analysts compute financial ratios of public companies to evaluate their strengths and weaknesses and to identify which companies are profitable investments and which are not.
    • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.

  • Market/Book Ratio

    • The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
    • The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
    • Industries that require more infrastructure capital (for each dollar of profit) will usually trade at P/B ratios much lower than, for example, consulting firms.
    • P/B ratios do not, however, directly provide any information on the ability of the firm to generate profits or cash for shareholders.
    • It is also known as the market-to-book ratio and the price-to-equity ratio (which should not be confused with the price-to-earnings ratio), and its inverse is called the book-to-market ratio.

  • Trend Analysis

    • In addition to using financial ratio analysis to compare one company with others in its peer group, ratio analysis is often used to compare the company's performance on certain measures over time.
    • Creditors and company managers also use ratio analysis as a form of trend analysis.
    • For example, they may examine trends in liquidity or profitability over time.
    • Trend analysis using financial ratios can be complicated by the fact that companies and accounting can change over time.
    • When examining historical trends in ratios, analysts will often make adjustments to the ratios for these reasons, perhaps performing some ratio analysis in which they segment out business segments that are not consistent over time or they separate recurring from non-recurring items.

  • Times-Interest-Earned Ratio

    • Times interest earned (TIE), or interest coverage ratio, is a measure of a company's ability to honor its debt payments.
    • EBIT = Earnings Before Interest and Taxes, also called operating profit or operating income.
    • EBIT is a measure of a firm's profit that excludes interest and income tax expenses.
    • The EBITDA of a company provides insight on the operational profitability of the business.
    • Use a company's index coverage ratio to evaluate its ability to meet its debt obligations