One of the most common profitability ratios is the profit margin. This can be expressed as the gross profit margin or net profit margin, and it can be expressed by company, by sector, by product, or by individual unit. The information reported on the income statement will enable you to determine the overall profit margin. If additional breakdowns are provided, more detailed margins can be calculated.
Gross Profit Margin = Gross Income / Total Revenue
Net Profit Margin = Net Income / Total Revenue
Other commonly used ratios are returns, expressed as return on investment or equity, return on assets, and return on capital employed. These ratios measure a company’s ability to use its capital, or its assets, to generate additional value.
Return on Investment (ROI) or Return on Owners’ Equity = Net Income / Average Owners’ Equity
Return on Assets (ROA) = Net Income / Average Total Assets
Return on Capital Employed (ROCE) = Net Income Before Interest and Tax / Capital Employed (Total Assets minus Current Liabilities)
When evaluating investment opportunities, profits are often measured per share:
Earnings per Share = Net Profit After Tax and Dividends / Ordinary Shareholders' Equity
Another commonly used ratio to show the yield on an investment is:
Dividend Yield Ratio = Dividends per Share / Market Value per Share
And, to measure how the price of an investment correlates with the earnings on that investment, you can use the:
Price to Earnings Ratio = Market Value per Share / After-Tax Earnings per Share