Profitability ratios
How much of each sale becomes profit, and how well do assets and equity generate returns? Profitability ratios cover margins and returns such as ROA, ROE and ROIC.
- Gross profit marginRatio
Gross profit ÷ Revenue - Operating profit marginRatio
Operating income ÷ Revenue - Net profit marginRatio
Net income ÷ Revenue - EBITDA marginRatio
EBITDA ÷ Revenue - Return on assets ROARatio
Net income ÷ Average total assets - Return on equity ROERatio
Net income ÷ Average shareholders' equity - Return on invested capital ROICRatio
Net operating profit after tax ÷ Average invested capital - DuPont analysisRatio
Net profit margin × Asset turnover × Equity multiplier
Reading profitability ratios together
Profitability ratios come in two families. Margins divide a profit figure by revenue: gross margin shows what is left after the cost of goods sold, operating margin after running costs, and net margin after interest and tax as well. Returns divide profit by the resources used to earn it: total assets for return on assets, shareholders’ equity for return on equity, and invested capital for return on invested capital.
Compare margins with the same business over time and with businesses that sell in a similar way, because cost structures differ widely between industries. When comparing returns, check what is in the denominator: borrowing can raise return on equity without changing return on assets, which is why the DuPont breakdown and the ROE vs ROA comparison are useful.
Financial statement map
Choose a line item to see which ratios use it, or choose a ratio to see its line items and the calculation.
Illustrative example company, not actual results. Balance sheet ratios use year-end balances.
Balance sheet (end of year)
Assets
Liabilities and equity
Income statement (year)
Ratios
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Line items and the ratios that use them (text view)
- Gross profit
- Gross profit margin (numerator)
- Revenue
- Gross profit margin (denominator), Operating profit margin (denominator), Net profit margin (denominator), EBITDA margin (denominator), DuPont analysis
- Operating income
- Operating profit margin (numerator)
- Net income
- Net profit margin (numerator), Return on assets (numerator), Return on equity (numerator), DuPont analysis
- EBITDA
- EBITDA margin (numerator)
- Total assets
- Return on assets (denominator), DuPont analysis
- Shareholders' equity
- Return on equity (denominator), DuPont analysis