Profitability Ratios

< BACK

Profitability Ratios

Closely linked with income ratios are profitability ratios, which shed light upon the overall effectiveness of management regarding the returns generated on sales and investment. These are a class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.

Sales or Revenues Annual Change:
Flat or decreasing is not good, increasing is good.

Cost of Sales Annual Change:
If the Cost of Sales is increasing, Sales should increase too. A small change isn't considered too important. A decrease is good, an increase warrants further investigation.

Price to Sales Ratio:
Lower ratios are better. This ratio represents how much you must invest to receive one dollar worth of sales. This ratio is Industry sensitive and should be compared to companies in the same industry. Good is less than 1, caution between 1 and 3, and greater than 3 is a warning sign.

Current Price	= Price to Sales Ratio

Revenue per Share

Gross Profit Margin current/previous year:
Expect these numbers to be greater than 50%.

Cost of Sales	= Gross Profit Margin

Sales

Gross Profit Margin Annual Change
Increasing = good, decreasing = bad.

Earnings Confidence Rating:
This is a ratio between Net Income and Net Cash from Operations and measures quality of earnings. How efficient is the company in producing Earnings is the question answered here. The higher the number the higher the quality of Earnings. Compare to peer companies. Very Good: over 1.5; Good: Between 1 and 1.5; Not Good: Below 1.

Net Income from Operations	= Earnings Confidence Rating

Net Income

Number of Shares Outstanding Annual Change
If increasing, why? Small increases may represent employee options, which, if given to all employees is normally good. Larger increases may represent dilution.