3.6 Profitability Ratios

  1. LG5

There are many measures of profitability. As a group, these measures enable analysts to evaluate the firm’s profits with respect to its sales, assets, or the owners’ investment. Owners, creditors, and managers pay close attention to boosting profits because of the great importance the market places on them.

Common-Size Income Statements

A useful tool for evaluating profitability in relation to sales is the common-size income statement. Each item on this statement is expressed as a percentage of sales. Common-size income statements prove especially useful when comparing performance across years because it is easy to see if certain categories of expenses are trending up or down as a percentage of the total volume ...

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