Definition of Profitability ratios:
For most profitability ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a previous period indicates that the company is doing well. Profitability ratios are most useful when compared to similar companies, the company's own history, or average ratios for the company's industry.
Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders' equity over time, using data from a specific point in time.
Measures that indicate how well a firm is performing in terms of its ability to generate profit. Formulae of some of the common ratios are as follows: (1) Book Value Per share: Total common (ordinary) equity ÷ Number of common (ordinary) shares issued and outstanding. (2) Dividends Per Share: Dividends paid ÷ Number of common (ordinary) shares issued and outstanding. (3) Earnings Per Share: (Net income - preferred stock or preference share interest) ÷ Number of common (ordinary) shares issued and outstanding. (4) Gross profit percentage: Total cost of sales in a period x 100 ÷ Total sales revenue for that period. (5) Net income percentage: Net income for a period x 100 ÷ Total sales revenue for that period. (6) Operating profit percentage: Earnings before interest and taxes (EBIT) in a period x 100 ÷ Total sales revenue in the same period. (7) Return On Common equity: (Net income for a period - Dividends) ÷ (Common equity - Preferred stock). (8) Return On Investment: Net income ÷ Total assets.
How to use Profitability ratios in a sentence?
- The profitability ratios indicated positive current and future performances from the company so we decided to invest extensively in the company.
- Profitability ratios show how efficiently a company generates profit and value for shareholders.
- Higher ratio results are often more favorable, but ratios provide much more information when compared to results of similar companies, the company's own historical performance, or the industry average.
- The firm was analyzing its profitability ratios of the stocks in its investment portfolio to provide a better return on its investments in order to generate more profit in the next quarter.
- I wanted to know what our profitability ratios were because that would tell me how well our business was doing.
- Profitability ratios are metrics that assess a company's ability to generate income relative to its revenue, operating costs, balance sheet assets, or shareholders' equity.
Meaning of Profitability ratios & Profitability ratios Definition