This comprehensive tutorial covers everything you need to know about profitability ratios, from their definitions to formulas, calculations, and interpretations. Ratios such as gross profit margin, operating profit margin, net profit margin, return on total assets, and return on total equity will be discussed in this tutorial.

What are Profitability Ratios?
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Profitability ratios are used to determine and evaluate a company's ability to generate income against the expenses it incurs. When evaluating its performance, these ratios consider various elements of the company's balance sheet and profit and loss account.

Profitability Ratios Formulas
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Gross Profit Margin = Gross Profit / Revenue
Operating Profit Margin = Operating Profit/Net Sales * 100
Net Income Margin = Net Profit/Net Sales * 100
Return on Total Assets = Operating Profit (EBIT) /Average Total Assets
Return on Total Equity = Net Income /Shareholder’s Equity

Relevance and Use
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- Profitability ratios are used to evaluate a company's performance by assessing profitability at several levels, such as gross, operating profit, and EBITDA.
- At different levels, these ratios illustrate the percentage of sales absorbed by operational expenses. As a result, the lower the operating expense ratio, the higher the profitability, and hence the better the performance.

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