Financial
Profitability
Example

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Four ratios are used to describe Profitability.

1. Return on Investment is also known as Return on Assets and Rate Earned on Total Assets. It is defined as (Return on Investment = Net Profit / Total Assets). It measures the earning power of the company's assets and thus the effectiveness of its management.
2. Return on Sales is also known as Profit Margin. It is defineds as (Return on Sales = Net Profit After Taxes / Net Sales). It measures the profit per dollar of sales. The higher this ratio the better able the firm is able to weather adverse business condition such as falling prices and rising costs.
3. Return on Equity also known as Rate Earned on Stockholders Equity and Return on Net Worth. It is defined as (Return on Equity = Net Profit / Equity). This ratio is as close as one can get on the true performance of a business.
4. Return on Invested Capital is defined as (Return on Invested Capital = Net Profit After Taxes/Long Term Debt + Equity).