By analyzing the profit & loss statement, right from the first item of net sales (top line), till the calculation of net profit (bottom line) to compute the various profitability ratios and returns. At each level, a basic calculation can be performed to understand the progress of the company’s profitability.

Profitability ratios are divided into two types:

Ratios that show margins represent the firm's ability to translate sales into profits at various stages of measurement. Ratios that show returns represent the company’s ability to measure the overall efficiency (through productivity) in generating returns for its shareholders.

Profitability ratios measure the firm’s efficiency in generating profits. It is important to note that the operating profit is measured by the firm’s EBIT and the net profit is measured by PAT.

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Tina Bhatcommented onApril 26th, 2019at10:27 AMWhich of the two types of ratios mentioned above tells us that a company will give higher dividends in the future?