Profitability Ratios for Fundamental Analysis
Profitability ratios are by used by fundamental analysts to evaluate a company’s financial performance by measuring the costs the company incurs against its ability to generate earnings. Profitability ratios can help potential investors gain an understanding of the debt and asset management of a company and how well it is performing over time and relative to its industry competitors. The company’s income statement and its balance sheet provide many of the metrics required to calculate these ratios.
Some of the primary profitability ratios used by fundamental investors include
(1) profit margin, which gives an indication of how well the company controls its costs
(2) return on assets, which looks at income earned by the company through its assets
(3) return on equity, which measures earned income against shareholder’s equity. In calculating these ratios, it is important to exclude any extraordinary items or events that might distort the measure.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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