Profitability Ratios

Profitability Ratios
A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.

Some examples of profitability ratios are profit margin, return on assets and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.

For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season. Therefore, it would not be too useful to compare a retailer's fourth-quarter profit margin with its first-quarter profit margin. On the other hand, comparing a retailer's fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative.


Investment dictionary. . 2012.

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  • Profitability ratios — Ratios that focus on the profitability of the firm. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment. The New York Times Financial Glossary …   Financial and business terms

  • profitability ratios — Ratios that focus on how well a firm is performing. profit margins measure performance with relation to sales. rate of return ratios measure performance relative to some measure of size of the investment. Bloomberg Financial Dictionary …   Financial and business terms

  • profitability ratios — accounting ratios used to estimate the profitableness of a business …   English contemporary dictionary

  • profitability ratio — /prɒfətəˌbɪləti ˈreɪʃioʊ/ (say profuhtuh.biluhtee raysheeow) noun Commerce any of the ratios which are calculated to assess a business s ability to generate profit as the ratio of sales returns to costs, of sales returns to assets, etc …  

  • Rate of return ratios — Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm. The New York Times Financial Glossary …   Financial and business terms

  • rate of return ratios — Ratios that measure the profitability of a firm in relation to various measures of investment in the firm. Bloomberg Financial Dictionary …   Financial and business terms

  • operating performance ratios — Various ratios used to analyse the financial performance of a company in terms of the return generated by the sales for an accounting period. The higher the ratios, the higher the profitability of the organization. Examples are net profit… …   Accounting dictionary

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  • Rate of return — In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested.… …   Wikipedia

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