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Profitability Ratios

Profitability

  • Provides the owners perspective
  • Is the firm yielding advantageous returns or results? 
  • How profitable is a company in relation to the assets and the sales that made its profits possible?
  • Those interested in mergers and acquisitions consider this key for selecting candidates

Return on sales (ROS) = (Net Incomes/Annual Net Sales) x 100

-This ratio indicates the level of profit from each dollar of sales, and therefore measures the efficiency of the operation.

-This ratio can be used as a predictor of the company’s ability to withstand changes in prices or market conditions.

Return on Assets (%) (ROA) = Net Income/Total Assets x 100

-A critical indicator of profitability

-Companies which use their assets efficiently will tend to show a ratio higher than the industry norm

Return on Net Worth (Return on Equity) (%) = Net Income/Net Worth x 100

-This is the ‘final measure’ of profitability to evaluate overall return.

-This ratio measures return relative to investment in the company.

-Return on Net Worth indicates how well a company leverages the investment in it. 

-A relationship of at least 10% is regarded as a desirable objective for providing dividends plus funds for future growth.

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