Profitability Ratios Definition
Profitability ratios are used to measure the ability of a business and its management to generate profit.
Popular Profitability Ratios List
A selection of popular profitability ratios from the Double Entry Bookkeeping Ratios Guide.
- Gross Profit Percentage
- Overhead Ratio
- Return on Sales
- Net Profit Ratio
- ROCE – Return on Capital Employed
- Return on Assets ROA
Profitability Ratios Analysis
Profitability ratios should not be viewed in isolation but looked at over a period of time using trend analysis and in comparison to other businesses in your industry.
In addition, in order to give a full picture of what is happening, they should be viewed relative to other ratios calculated for the business such as liquidity ratios, efficiency ratios, leverage ratios, activity ratios, and investor ratios.
Profitability ratios normally measure profit and therefore the higher the value the more profit is being generated and the better the business is performing. There are exceptions, in the examples below the profitability ratio Overheads to Sales, measures overheads as a percentage of sales and therefore a lower value is preferable.
Profitability Ratios Formula
There are numerous examples of profitability ratios, however, it is important to select the key ratios which relate to your business. The industry sector, size, and complexity of the business will determine the most appropriate ratios to use and many may not be relevant or worth calculating, particularly for a small business.
|Profitability Ratio||Profitability Ratio Formula|
|Return on Sales Percentage||Profit before Interest and Tax / Sales x 100%|
|Gross Margin Percentage||Gross Profit / Sales x 100%|
|Overhead Ratio||Overheads / Sales x 100%|
|Net Margin Percentage||Net Profit / Sales x 100%|