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*Category Archives for "Profitability Ratio"*

4 ## Gross Profit Margin Ratio

## Definition - What is Gross Profit Margin Ratio?

This is an in-depth guide on how to calculate Gross Profit Margin (GPM) ratio with detailed interpretation, example, and analysis. You will learn how to utilize its formula to assess a firm's profitability.

The gross profit margin ratio, also known as gross profit percentage ratio, is a particularly important calculation to include in your analysis of a potential investment, because it discloses information about a company’s profitability.

More specifically, the gross profit margin ratio measures a firm’s revenues against the variable costs required to produce those revenues, in order to determine the percentage of profits that are being generated.

The ratio value demonstrates a company’s ability to operate cost-effectively, since the money that’s available to fund operations and future growth comes in large part from the profits that are created when goods or services are sold.

Another way to look at the gross profit rate is as a gauge of how efficiently a business is providing a service or product, in relation to the price its customers are willing to pay for it.

The less it costs to get a service or merchandise to market, the more profitable a company will be.

[Click to continue]This is a detailed guide on how to calculate Return on Operating Assets (ROOA) with thorough interpretation, example, and analysis. You will learn how to use this ratio formula to assess a company's profitability.

The return on operating assets (ROOA) measures the amount of profit a company makes with respect to its operating assets.

ROOA is like return on assets (ROA); the only difference being that ROOA only includes the assets that are involved in running the business (operating assets), while ROA includes all assets of the company.

ROOA allows management to understand which assets are required for business operations, and which can eventually be eliminated.

[Click to continue] 6 ## Net Profit Margin Ratio

## Definition - What is Net Profit Margin Ratio?

This is a detailed guide on how to calculate Net Profit Margin ratio (NPM) with thorough interpretation, analysis, and example. You will learn how to use its formula to evaluate a firm's profitability.

When it comes to evaluating a company’s overall performance for investment purposes, the net profit margin ratio or net profit percentage is one of the most useful financial ratios.

By measuring net income against revenues, the profit margin ratio demonstrates exactly what percentage of each sales dollar remains as profit after a company’s expenses have been paid.

When you use this calculation to measure the results from a range of accounting periods, you can track the trend of a company’s financial accomplishments over a period of time.

You can also use the net profit ratio to contrast and compare the commercial performance of the business you’re interested in, with its closest competitors.

In the end, what this ratio really shows you is just how effective a business is at converting its sales into profits.

This is crucial information, since your investment dividends will rely heavily on those net earnings.

[Click to continue]This is a complete guide on how to calculate Return on Average Equity (ROAE) with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a company’s profitability.

The return on average equity (ROAE) is a measure of a company’s net income in relation to its average shareholders’ equity value over the past two years.

It is similar to return on equity (ROE), with the only difference being the denominator.

In the ROA calculation, the denominator is shareholders’ equity, as opposed to average shareholders’, which is used as the denominator in ROAE.

The distinction is made between the two because shareholders’ equity is constantly changing from share buybacks and additional stock issuance.

So ROAE uses the average shareholders’ equity because some investors argue that it is a more accurate figure than regular shareholders’ equity.

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