profitability ratios

  

Definition

Measures that indicate how well a firm is performing in terms of its ability to generate profit. Formulae of some of the common ratios are as follows: (1) Book Value Per share: Total common (ordinary) equity ÷ Number of common (ordinary) shares issued and outstanding. (2) Dividends Per Share: Dividends paid ÷ Number of common (ordinary) shares issued and outstanding. (3) Earnings Per Share: (Net income - preferred stock or preference share interest) ÷ Number of common (ordinary) shares issued and outstanding. (4) Gross profit percentage: Total cost of sales in a period x 100 ÷ Total sales revenue for that period. (5) Net income percentage: Net income for a period x 100 ÷ Total sales revenue for that period. (6) Operating profit percentage: Earnings before interest and taxes (EBIT) in a period x 100 ÷ Total sales revenue in the same period. (7) Return On Common equity: (Net income for a period - Dividends) ÷ (Common equity - Preferred stock). (8) Return On Investment: Net income ÷ Total assets.

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  • The profitability ratios indicated positive current and future performances from the company so we decided to invest extensively in the company.

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  • The firm was analyzing its profitability ratios of the stocks in its investment portfolio to provide a better return on its investments in order to generate more profit in the next quarter.

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  • I wanted to know what our profitability ratios were because that would tell me how well our business was doing.

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