Business Finance Online

Profitability Ratios


Profitability Ratios attempt to measure the firm's success in generating income. These ratios reflect the combined effects of the firm's asset and debt management.

Profit Margin

The Profit Margin indicates the dollars in income that the firm earns on each dollar of sales. This ratio is calculated by dividing Net Income by Sales.

Return on Assets (ROA) and Return on Equity (ROE)

The Return on Assets Ratio indicates the dollars in income earned by the firm on its assets and the Return on Equity Ratio indicates the dollars of income earned by the firm on its shareholders' equity. It is important to remember that these ratios are based on Accounting book values and not on market values. Thus, it is not appropriate to compare these ratios with market rates of return such as the interest rate on Treasury bonds or the return earned on an investment in a stock.

Example Problems
Use the information below to calculate the Profit Margin, Return on Assets (ROA),
and Return on Equity (ROE).
Sales: $
Net Income: $
Total Assets: $
Total Owners' Equity: $
Profit Margin: %
Return on Assets: %
Return on Equity: %
   

 

© 2002 - 2010 by Mark A. Lane, Ph.D.