What are the key financial ratios for profitability analysis?



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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