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Profitability Ratios

It discusses the basics of Profitability Ratios before diving into each of them in further detail.

Gopal Kavalireddi
1 minutes read
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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:

  1. Profitability Margin Ratios

  2. Profitability Return Ratios

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.


Next Chapter

Profitability Margin Ratios

7 Lessons

This chapter explains the different profitability terms & ratios in fundamental analysis of stocks. Learn the meaning of the most important profit margin ratios.

Profitability Return Ratios

7 Lessons

These ratios are a blend of P&L and cash flow statements. Understand how the efficiency of generating returns are measured using these ratios.

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Tina Bhat commented on April 26th, 2019 at 10:27 AM  
Which of the two types of ratios mentioned above tells us that a company will give higher dividends in the future?