Profitability Ratios

The Higher the Better (Mostly)

Profitability ratios help you evaluate your company’s ability to generate profits. There are dozens of them, a fact that helps keep financial folks busy. But here we are going to focus on just five. These are really the only ones most entrepreneurs need to understand and use. Profitability ratios are the most common of ratios. If you get these, you’ll be off to a good start in analyzing your financial reports (or any other company’s).

Before we plunge in, however, do remember the artful aspects of what we’re looking at. Profitability is a measure of a company’s ability to generate sales and to control its expenses. None of these numbers is wholly objective. Sales are subject to rules about ...

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