Profitability ratios show how efficiently a company converts sales and capital into profit. Track gross, EBITDA, EBIT and net margins alongside ROE, ROCE and ROA. Strong ratios are more credible when they persist through cycles and are supported by cash flow without excessive leverage.
Margins
Margins reveal cost structure and pricing power. Compare with the same company over time and with similar business models.
ROE
Measures profit generated on average shareholder equity. Debt and buybacks can inflate it.
ROCE
Measures operating return on capital used in the business. It is valuable for comparing capital-intensive companies.
ROA
Shows profit relative to total assets and is useful where assets drive earnings, but asset values and business models differ.
DuPont analysis
Breaks ROE into margin, asset turnover and leverage to explain why shareholder returns changed.
Formulas
| Metric | Simplified formula |
|---|---|
| Gross margin | Gross Profit ÷ Revenue × 100 |
| EBITDA margin | EBITDA ÷ Revenue × 100 |
| Net margin | Net Profit ÷ Revenue × 100 |
| ROE | Net Profit ÷ Average Shareholders’ Equity × 100 |
| ROCE | EBIT ÷ Average Capital Employed × 100 |
| ROA | Net Profit ÷ Average Total Assets × 100 |
Use average balance-sheet values where appropriate and confirm definitions used by the company or data provider.
How to use this in company analysis
- Calculate at least three to five years of history.
- Compare the company with relevant peers using consistent definitions.
- Read notes to accounts and management commentary behind unusual movements.
- Reconcile profit, balance-sheet growth and operating cash flow.
- Do not make a buy or sell decision from one ratio.
Important limitations
- Accounting policies and exceptional items can reduce comparability.
- Sector economics determine what is normal or risky.
- Quarterly values may be seasonal and unaudited.
- Financial companies require sector-specific metrics.
Educational information only. It is not a personalised investment, tax, accounting or buy/sell recommendation. Verify figures from the company’s latest official filings.