Question

What are important profitability ratios? How are these worked out?

Answer 1

Answer:

Explanation:

Profitability ratio refers to the financial metrics used for evaluating the ability of the organisation  to generate profit relative to its cost and expenses connected with the generation of income during the said period. This ratio reflect the proper utilization of company`s  assets to generate profit and create value for shareholders.

The important Profitability Ratios are

• Return on Equity : :It helps in measuring the profitability of equity fund invested in the company.  It is a reflection of how well is the  owner’s funds have been managed in generating revenue for company.

• Earnings Per Share  : It helps is assessing the profitability from ordinary shareholder`s point of view.

• Dividend Per Share  : It is a measure of the dividend amount distributed to the shareholders by the company.  h.

• Price Earnings Ratio :  This ratio helps the investor in ascertaining the under and over value of the share price of the company.

• Return on Capital Employed  : It helps the owners in computing the percentage return on the funds invested by them in the company.

• Return on Assets : It reflects the percentage of net earnings proportion ate to the total assets of the company.

• Gross Profit : It is a reflection of business earning after considering the  cost related to the production of goods and services.

• Net Profit: It reflects the overall profitability of company after taking in account both direct and indirect cost.

Hope this helps.