Page 31 - DBP5043
P. 31
4. PROFITABILITY RATIOS
- MEASURE HOW EFFECTIVELY THE FIRM USES ITS ASSETS TO MAKE PROFITS
Types of ratio Definition Formula Indicator
A) Gross profit It shows the efficiency of The higher
margin the company in the better.
controlling its cost of ↑ Ratio tells us
goods sold about
company’s
pricing policy
Operating profit is
B) Operating derived after deducting
profit margin all costs and expenses ↑
excluding interest and tax The higher
the better,
the higher
the
profitability
C) Net profit This ratio is not useful for ↑ of the
ℎ
margin companies making losses company
The higher
D) Return on Indicates the the ROA due
assets management’s ability to ℎ to efficiency
make profits from the ↑ in asset
firm’s investment in asset utilization
The higher
E) Return on Measures the profit the ROE
equity earned by common ℎ ↑ better the
stockholder return for
shareholder
