Profitability ratios

Profitability ratios - these ratios show how successfully company is running its activities, how profitable are its processes and what the further tendencies for it are. There are two groups of ratios: margins and returns. Margin ratios show how the firm is able to translate money from sales into profits at various stages of measurement. Return ratios show how good the overall efficiency of the firm is generating returns for its shareholders.

Some margin ratios are: Gross margin - it shows what amount of money from the sales is kept in the form of profit. Higher ratio shows that bigger charges for goods or services are. Operating margin shows the level of earnings and losses from primary company’s activities. This ratio is more accurate than gross margin, because it includes not only the cost of sales, but also other components of operating income, such as marketing and other overhead expenses that help to sell a product. Net margin includes all other forms of expenses, which are not always have much to do with a company's main activities.

Return ratios show how various segments of business are turned into profit. Return On Assets show company's ability to turn assets into profit. This ratio shows the profitability of a company, which is achieved on all of its assets, financed by both: equity holders or debt holders. While return on assets shows the return for both, Return On Equity is calculating the return directly on its investment by shareholders. Most of the profitability ratios usually are stated in percentage terms, and higher ratio is better and shows better situation in the company.