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.
Profitability Margin Ratios7 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 Ratios7 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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