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Profitability ratios are used to measure the ability of a company to generate earnings (profit) relative to the resources. In this section, we cover the most important profitability ratios you need to know.

What are profitability ratios?

Profitability ratios are a set of measurements indicating the capability of a company to generate profit relative to the resources used. The main goal of profitability ratios is to gauge how effective a company is in using its assets to produce an optimal return.

Profitability ratios are further divided into two categories: return ratios and margin ratios. Return ratios often compare net income or other similar variables (return) with assets, equity, debt, or other indicators. These ratios are mainly useful to estimate the proportion of potential return investors can get.

Meanwhile, margin ratios measure the level of profit at numerous degrees of calculations, some examples are earnings before interest and taxes (EBIT), net income, and net income margin. You can take advantage of these measurements to get a general feel of which kind of resources used to generate sales and how much of them are used.

List of profitability ratios

Below is the complete list of profitability ratios we have covered. Each will provide a detailed overview of the ratio, what it’s used for, and why.

They also explain the formula behind the ratio and provide examples and analysis to help you understand them.

More financial ratios

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