Profitability ratios compare income statement accounts and categories to show a company’s ability to generate profits from its operations. Furthermore, investors and creditors can use profitability ratios to judge a company’s ROI based on its levels of resources and assets.
Measures the ability of a company to generate profits from the investments of its shareholders. Furthermore, this ratio is imperative when analyzing a company’s financial standing from an investors perspective as it indicates how profit each dollar of common stockholders’ equity generates. Moreover, this being said it is always preferable to have a high return on equity because it shows that the company is using the investors capital effectively. However, the ROE ratio varies in each industry and it should be used to compare companies in the same industry.
Return on Equity Ratio:
Measures how profitable a company is by selling its inventory of merchandise. Furthermore, a higher ratio is more favourable as it indicates that the company is selling their inventory at a higher profit percentage. Not only that, companies with a higher gross profit percentage means that the company will have more money to pay operating expenses.
Gross Margin Ratio:
Measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. Furthermore, creditors and investors utilize the profit margin ratio to check whether the company can effectively convert sales into net income. Additionally, since the profit margin ratio measures a company’s ability to manage its expenses relative to its net sales, a higher profit margin is always more favourable.
Profit Margin Ratio:
Indicated how profitable a company’s assets are as it measures how efficiently a company can manage its assets to produce profits during a period. Furthermore, a higher return on assets ratio is highly imperative as it shows that the company is more effectively managing its assets to produce greater amounts of net income.
Return on Assets Ratio:
