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Profitability ratios are calculated on the basis of profit earned by a business. This ratio gives a percentage which is used to assess the financial condition of a business
1. Return on Assets: This ratio measures the earning per rupee from assets which are invested in the company. A higher profit ratio is good for the company.
Return on Assets = Net Profit ÷ Total Assets
2. Return on Equity: This ratio deals with measuring profitability of equity fund that is invested by the company. It also measures how owner’s funds are utilized profitably to generate company revenues. A high ratio represents the better position of a company.
Return on Equity = Profit after Tax ÷ Net worth
Where Net worth = Equity share capital, and Reserve and Surplus
3. Earnings per share: This ratio helps in measuring profitability from an ordinary shareholder’s viewpoint. A high ratio represents a well off company.
Earnings per share = Net Profit ÷ Total no of shares outstanding
4. Dividend per share: This ratio measures the amount of dividend that is distributed by the company to its shareholders at the end of an accounting period. A high ratio represents that the company is having surplus cash.
Dividend per share= Amount Distributed to Shareholders ÷ No of Shares outstanding
5. Price Earnings Ratio: A profitability ratio that is used by an investor to check for share price of the company which can be undervalued or overvalued. It also indicates an expectation about the company’s earning and payback period for the investors.
Price Earnings Ratio = Market Price of Share ÷ Earnings per share
6. Return on capital employed: This ratio is all about the returns earned by the company from the funds invested in the business by its owners. A high ratio is indicative of a better position for the company.
Return on capital employed = Net Operating Profit ÷ Capital Employed × 100
7. Gross Profit: Gross profit ratio or GP ratio is a profitability ratio that deals with the relationship between gross profit and the total net sales revenue. This ratio is used to evaluate the operational performance of the business.
8. Net Profit: This is a profitability ratio that deals with relationship between net profit after tax and net sales. It is calculated by dividing the net profit (after tax) by net sales.