Brief Definition
Profitability ratios are financial metrics used to assess a company’s ability to generate profit relative to its revenue, assets, or equity.
Further Explanation
Profitability ratios are financial metrics used to assess a company’s ability to generate profit relative to its revenue, assets, or equity. These ratios help investors and analysts evaluate how efficiently a company is generating profit and managing its expenses.
Example:
Return on Assets (ROA) is a common profitability ratio. It measures how efficiently a company uses its assets to generate profit. The formula for ROA is:
ROA=Net Income/Total Assets × 100
If a company has a net income of $200,000 and total assets of $1,000,000, its ROA would be:
ROA= 200,000/1,000,000 x 100 = 20%
This means the company generates a 20% return on its assets.