Concept of Profitability Ratio Analysis
Profit is one of the most important objective of doing business. Without Profit, no business can survive in long run. Profitability Ratio refers to the Ratio analysis which are used to determine the return to the Shareholders/Investors and the margin at which company is operating. Any Investors invest in the company with two Motive i.e. earning dividend and Capital appreciation in the value of Share and this is possible only when the company will generate profit. Profitability Ratios determine the firms overall efficiency and the performance of the company. Profitability Ratio Analysis Assignment Help is a concept derrived from Financial Ratio Analysis.
Profitability Ratios are of two types
Margin Ratios are divided into 4 parts:
- Gross Profit Margin: This ratio determines how the company is controlling its inventory cost and manufacturing cost and then passing the benefit to their customers.
Gross Profit Ratio = Gross Profit/Net Sales
- Operating Profit Margin: This ratio measures the overall operating efficiency of the business. The formulae for Operating Profit Margin Ratio is as follows :
Operating Profit Margin = EBIT/Net Sales
- Net Profit Margin: It is one of the most important ratio which determines the profit of the company on each dollar of Sales. This ratio is calculated after considering all kind of taxes, Interest and depreciation. The formulae for Net Profit Margin Ratio is as follows
Net Profit Margin = Net Income/ Net Sales
- Cash Flow Margin: This ratio determines the relationship between Cash Generated from Operating and Net Sales. The purpose of Cash Flow Margin is to measure the ability of a firm to translate Sales into Cash.
Cash Flow Margin = Cash Flow from operating Activities/Net Sales
Return Ratios are divided into 3 parts:
- Return on Assets: Return on Investment is a ratio which measures the efficiency with which company is managing its Assets and using it to generate Profit. The higher the ratio, higher would be the Company efficiency in generating return.
Return on Assets = Net Income/Total Assets
- Return on Equity: Return on Equity measures return on the money invested by the Equity Shareholders.
Return on Equity = Net Income/Stockholders Equity
- Cash Return on Assets: This ratio measures the cash generated from operating activities in comparison with the total assets.
Cash Return on Assets = Cash flow from operating Activities/Total Assets
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