Define Profitability Ratio Analysis

Define Profitability Ratio Analysis

What Is Profitability Ratio Analysis?

The profitability ratio analysis is a set of financial analysis metrics that are used to assess the financial capability of a business and to measure the ability of the business to generate earnings other than the expenses and the relevant costs incurred during a specific period of time. The profitability ratio analysis shows the company’s overall efficiency and performance.

On the other hand, the profitability analysis is one of the components of the enterprise resource planning (ERP) that is used to allow the administrators to determine the profitability of a proposal and increase or optimize the profitability of an existing project.

The Two Types of Profitability Ratios

The profitability ratio is divided into two types: margins and returns.

Margin Ratios

The margin ratio represents the company’s ability to translate the sales dollars into profits at various cost levels.

Returns Ratios

The return ratio shows the ability of the company to measure the overall efficiency in generating returns.

Uses and Limitations of Profitability Ratio Analysis

Uses

Limitations

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