A naukri.com initiative
Medium
2M
165
Image Credit: Medium
Ratio Mastery — Part IV
- Profitability ratios show how efficiently a company generates income from its operations, assets, and shareholders' equity.
- The Gross Profit Margin measures how efficiently a company converts revenue into profit after accounting for direct costs.
- The Operating Profit Margin measures how much profit a company makes from its business operations after covering both COGS and operating expenses.
- The EBITDA Margin measures a company's profitability before accounting for interest, taxes, depreciation, and amortization.
- The Net Profit Margin measures the percentage of revenue left after all expenses, including COGS, operating expenses, interest, taxes, and any other non-operational costs, have been deducted.
- The Return on Assets (ROA) ratio measures how efficiently a company uses its total assets to generate profit.
- The Return on Equity (ROE) ratio measures how efficiently a company uses its shareholders' equity to generate profit.
- The Return on Invested Capital (ROIC) measures how efficiently a company uses all forms of invested capital — both debt and equity — to generate profit.
- High profitability ratios demonstrate operational efficiency and financial discipline, making a company more attractive for VCs seeking high returns with controlled risk.
- Low profitability ratios can raise red flags for VCs and may indicate a company has potential issues with cost control, operational inefficiency, or a business model that may not be scalable.
Read Full Article
9 Likes
For uninterrupted reading, download the app