How Do you - Learn about Profitability Ratios

The profitability ratios include such ratios as:

• Operating profit margin.
• Net profit margin.
• Return on assets.
• Return on equity.

Operating profit margin measures the earnings before interest and taxes.

Net profit margin measures how much the company is earning relative to its sales. A company with a higher profit margin than its competitors is more efficient than its competitors.

The net profit margin measures the earnings after tax has been taken into account.

Return on assets tells how well the company is being managed. It shows whether the company is using all its resources to the maximum extent. Return on assets is calculated as earnings after taxes divided by total assets.

Return on equity measures how well the management is doing for you, the investor, because it shows how much earnings you are gaining for each of the dollars that you invest. It is calculated on the basis of earnings after taxes divided by equity.

All these ratios are easy to calculate and the information is readily available in the company’s annual report. What you have to do is review the income statement and Balance...