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

© AccountingInfo.com