Glossaries - Report Companions: Financial Analysis Edge - Profitability Ratios

These financial ratios are generally understood as measures of firm and industry profitability: All ratios are derived from balance sheet data.

1. Return on Assets:
Net Profit /Total Assets

Return on Assets (pre and post tax) is a critical indicator of profitability. Companies which use their assets efficiently will tend to show a ratio higher than the industry norm.

2. Return on Net Worth:
Pre- or After Tax Net Profit / Net Worth

This is the 'final measure' of profitability to evaluate overall return (pre and post-tax). This ratio measures return relative to investment in the company. Return on Net Worth indicates how well a company leverages the investment in it.

3. Return on Sales
Pre- or After Tax Net Profit / Annual Net Sales

This measure indicates the level of profit from each dollar of sales. This ratio can be used as a predictor of the company's ability to withstand changes in prices or market conditions.