Profitability Ratios

Profitability ratios

Ratios that focus on how well a firm is performing. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment.

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Profitability Ratios

What Does Profitability Ratios Mean?

A class of financial metrics that help investors assess a business's ability to generate earnings compared with its expenses and other relevant costs incurred during a specific period. When these ratios are higher than a competitor's ratio or than the company's ratio from a previous period, this is a sign that the company is doing well.

Investopedia explains Profitability Ratios

Some examples of profitability ratios are profit margin, return on assets, and return on equity. It is important to note that one should understand the company and its business before making decisions that are based solely on ratios. For instance, some industries are seasonal, such as retailers, which typically experience higher revenues and earnings during the holiday season. Therefore, it would not be helpful to compare a retailer's fourth-quarter profit margin with its first-quarter profit margin. In contrast, comparing a retailer's fourthquarter profit margin with the profit margin from the same period a year before would be far more helpful.

Related Terms:
• Operating Profit
• Profit Margin
• Return on Assets—ROA
• Return on Equity—ROE
• Return on Investment Capital—ROIC