Profitability ratios - Introduction

Profitability is the basis for company's effectiveness assessment. To evaluate the profitability one may use the ratios relating selected profit type given in the profit and loss statement (typically the net profit) to the level of sales, assets or equity. The greater the values of these ratios, the better the company's profitability. There are no reference values for the ratios, thus to assess them we analyse how they change in time.

The group of profitability ratios includes:

• Gross profit margin,
• Operating profit margin,
• Return on sales (ROS) / Net profit margin,
• Return on assets (ROA),
• Basic earnings power ratio,
• Return on equity (ROE),
• Return on share (initial) capital.