Profitability and Activity Ratios

Financial ratios
1. Profitability ratios
2. Liquidity ratios
3. Solvency ratios
4. Activity ratios

Profitability ratios
1. What are the examples of ratios that provide information about the profitability of an entity?

  • Gross margin ratio
  • Profit margin ratio
  • Return on assets (ROA)
  • Return on equity (ROE)
2. How is gross margin ratio calculated?
Gross margin ratio = Gross profit / Net sales
3. How is profit margin ratio calculated?
Profit margin ratio = Net income / Net sales
4. How is quality of earnings ratio calculated?
Quality of earnings ratio
= Net cash provided by operating activities / Net income

Activity ratios
What are the examples of ratios that provide information about the operational activity of an entity?

  • Assets turnover ratio
  • Inventory turnover ratio
  • Days in inventory
  • Accounts receivable turnover ratio
  • Accounts receivable collection period
  • Accounts payable turnover ratio
  • Accounts payable payment period

 

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