Profitability ratio

Profitability ratio:

Owners invest funds in order to expect reasonable returns. The operating efficiency depends upon the profits earned out of investment made by shareholders/owners.

It helps to identify the requirements of management:

1) Is the profits earned are adequate?

2) What rate of return does it represent?

3) What is the rate of profit for different divisions and segments of the firm?

4) What are the earnings per share?

5) What was the amount paid in dividends?

6) What is the rate of return to equity-holders?

Profitability ratios can be determined on the basis of either sales or investments.

The profitability ratios in relation to sales are

(a) Profit margin(gross and net),

(b) Expenses ratio.

The profitability ratios in relation to investment are

(a) Return of assets,

(b) Return on capital employed,

(c) Return on shareholders’ equity.