Q2. List of profitability ratios
What are the key financial ratios that can be used to analyze the profitability of an entity?
A2.
Profitability ratios are calculated as follows:
(1) Profit margin ratio
= Net income / Sales
(2) Gross profit ratio
= Gross profit / Sales
= (Sales – Cost of goods sold) / Sales
(3) Return on assets (ROA)
= Net income / Average total assets
(4) Return on equity (ROE)
= Net income / Average stockholders’ equity
(5) Earnings per share (EPS)
= Net income for common stockholders / Weighted average number of common shares outstanding
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