Profitability Ratio helps investors to evaluate a company’s ability for generating income profit in relation to its revenue, operating costs, balance sheet assets & equity shareholders during a particular period of time. Higher Profitability Ratio generally show the ability of the company to generate profits & cash flows.
Return on Equity (ROE)
It measures a company’s annual return or net income divided by the value of its shareholders’ total Equity.
In simpler words, it measures the profit made on every 1 rupee of shareholders’ Equity.
Price per Earning ratio (P/E ratio)
P/E Ratio determines the relation between the current stock prices. The earnings of the company per share.
Lower the P/E ratio, lesser the price has to be paid for a particular share & vice versa.
Return on Capital Employed (ROCE)
ROCE shows how much operating profit a company makes compared to capital provided by various sources.
High ratio shows that a larger chunk of profits can be invested back into company for benefit of shareholders which is a sign of growth in the company.
Return on Asset (ROA)
ROA tells how the company is utilizing its assets to generate profits. Measuring ROA is more fruitful for companies which are highly dependent on assets for generating revenue like construction, steel industry etc.
Higher ROA shows higher efficiency of the company in generating profits through its assets employed.
Dividend per share
This profitability ratio shows the amount of dividend that is distributed to its shareholders by the company. The high ratio shows that the company has surplus cash.
Operating Profit Margin
Operating profit margin tells how well the company’s operations contribute to its profitability.
A higher margin shows the company is earning enough money from business operations to pay for all the costs involved in maintaining the business.
Net Profit Margin
This ratio indicates how profitable a company is after its expenses including interest & taxes. It can be derived by dividing the company’s net income by its total revenues.
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