Question

What are the required formulas to calculate a company's profitability and profitability ratios? please list the formulas.

Answer 1

The profitability ratios are primarily used as measures of return. It is used to measure and evaluate the ability of a company to generate income relative to its expenses during a period of time.

Profitability ratio:

1.Return on equity:

It is a profitability ratio that calculates how many dollars of profit a company generates with each dollar of shareholder’s equity.

It is calculated using the below formula:

Return on Equity= Net Income/Shareholder’s Equity

2.Return on Invested Capital

It is a profitability ratio that measures the return that investors earn from the capital invested.

It is calculated using the below formula:

Return on Invested Capital (ROIC)= Net Operating Profit after Tax (NOPAT)/Invested Capital

3.Return on assets:

It indicates the total profits produced by a company’s total assets during a period. It measures how efficiently a company is in earning a return on its investment in assets.

It is calculated using the formula below:

Return on assets= Net income/Average total assets

4.Gross Profit Margin:

It measures how much money is left over after paying its cost of goods sold.

It is calculated using the formula below:

Gross Profit Margin= Total sales – Cost of goods sold/ Total sales

5.Operating Profit margin:

It measures the total profit derived from its operating income.

It is calculated using the formula below:

Operating Profit= Operating Income/ Net Sales

6.Net Profit Margin

It measures the total profit earned from its sales after all the expenses are deducted.

It is calculated using the formula below:

Net Profit Margin= Net Profit/ Total Revenue

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