A type of accounting ratio/ financial ratio that is used as a measurement tool for the financial performance of a business over a specific period of time. Profitability ratios reflect the amount of profits a company has made from its operations, as compared to a certain element in its accounts. A general measure of profitability is the ratio relating a company’s profits to its revenues to determine its ability to make profits given the amount of revenues it has generated (the remaining profits after certain types of expenses are deducted).
Profitability ratios vary, depending on multiple factors including: business size, sector, intended use and purpose, etc. Examples of profitability ratios include return on capital employed (ROCE), profit margin, gross margin ratio, operating ratio, net profit ratio, earnings per share (EPS), return on net worth, etc.
A good profitability ratio varies by industry, country, etc. For example, a good net profit ratio in the retail sector might range between 0.5% and 3.5%.
