Profitability ratios compare income statement accounts and categories to show a company’s ability to generate profits from its operations. Profitability ratios focus on a company’s return on investment in inventory and other assets. These ratios basically show how well companies can achieve profits from their operations.
Investors and creditors can use profitability ratios to judge a company’s return on investment based on its relative level of resources and assets. In other words, profitability ratios can be used to judge whether companies are making enough operational profit from their assets. In this sense, profitability ratios relate to efficiency ratios because they show how well companies are using thier assets to generate profits. Profitability is also important to the concept of solvency and going concern.
Here are some of the key ratios that investors and creditors consider when judging how profitable a company should be: