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2.3 Profitability Ratios

By differentiate the income statement accounts and categories to show a company’s ability to generate profits from its operations. Profitability ratios focused on a company’s return on investment in inventory and other assets fundamentally, these ratios show how well companies can achieve profits from their operations. Investors and creditors can use profitability ratios to judge a company’s return on investment in inventory and other assets. These ratios basically show how well companies can achieve profits from their operations. There were five elements under the profitability ratios.

a) Gross Profits Margin

It is a profitability ratio that compares the gross margin of a business to the net sales. This ratio
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The amounts disclose the amount of gain that a business can extract from its total sales. The net sales part of the equation is gross sales minus all sales deductions, such as sales allowances. The net profit margin is aim to be a measure of the overall success of a business. A high net profit margin points that a business is determining its products correctly and is exercising good cost control. It is practicable for comparing the results of businesses within the same industry, since they are all subject to the same business environment and customer base, and may have approximately the same cost
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Above and beyond, the return on equity ratio proves how much profit each ringgit of common stockholders' equity creates. ROE is also a sign of how much helpful management is at using equity financing to fund operations and grow the company.

For the analysis, return on equity appraises how efficiently a firm can use the money from shareholders to generate profits and grow the company. Unlike other return on investment ratios, ROE is a profitability ratio from the investor's point of view which is not the company. More to the point, this ratio reckon how much money is produced based on the investors' investment in the company, not the company's investment in assets or something else. Higher ratios are almost always better than lower ratios, but have to be compared to other companies' ratios in the

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## Urban Outfitters Case Summary

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1453 Words | 3 PagesProfitability ratios express ability of the company to produce profit. This shows how well a company is performing in a given period of time. To compare the profitability for the companies, the investors use profitability ratios that are return on equity, profit margin, asset turnover, gross profit, earning per share. Return on asset indicates overall profitability of assets. It is the relationship between net income and average total assets. GM has 0.034 and Ford has 0.036. This indicates Ford is more profitable. Profit margin is how much of every dollar of sales the company keeps. Computing profit margin, net income divided by net sales. This indicates higher profit margin is more profitable and it has better control. Thus, GM’s profit margin is 3.4 percentages and Ford’s is 4.9 percentages. This indicates Ford has better control profitably compared to GM. Next ratio is gross profit rate. It is how much of every dollar is left over after paying costs of goods sold. Assets turnover represents how efficiency a company uses its assets to sales. This ratio is relationship between net sales and average total assets. GM’s is 0.98 and Ford’s is 0.75. This result represents GM is using its assets more efficiently. Gross profit margin is dividing gross profit, which is equal to net sales less cost of gods sold, by net sales. This ratio indicates ability to maintain selling price above its cost of goods sold. GM’s gross profit rate is 11.6 percentages. Ford’s is 5.7 percentages. GM is higher ratio, and it indicates strong net income. Also, it indicates the company has to spend lower operating expenses and the company is able to spend left money for covering fixed costs. Earnings per share indicate the company’s net earnings to each share common stock. This ratio shows margin between selling price and cost of goods sold. From these companies’ income statement, GM is $2.71 and Ford is $1.82. Because GM’s value is higher relative to Ford’s,

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## Formula Of Gross Profit Ratio

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