Definition of Profitability Ratio
Profitability ratios indicate a firm’s capacity to make revenues in relation to, shareholder’s equity, balance sheet assets, and operating costs. Investors and analysts use these ratios to assess a firm’s performance in terms of making revenues.
Data is selected from a specific time period to assess a firm in terms of profitability. If a company’s profitability ratios are higher, they indicate a firm is performing better in terms of revenues and cash flows. Normally the profitability ratios of one firm are compared to similar firms in an industry. This helps make investment decisions for investors.
Types of Profitability Ratios:
- Profit Margin
- Return on Assets
- Return on equity
- Return on Invested Capital
- Cash Flow