Profitability Ratios 1
Formula: Cost of goods sold (COGS) = Beginning inventory + Purchases – Ending inventory
Interpret: COGS=$87.200
The business spent exactly $87.200 on direct material, labor, and production costs to create or purchase the inventory that was sold during a specific period.
Formula: Net Profit Margin = (Net income / Sales)*100
Interpret: Net Profit Margin=0,17
For every $100 of revenue, the business keeps/retains $17 as profit after all expenses, interest, and taxes are paid.
Formula: Year-Over-Year Growth Rate = Profit 2025 / Profit 2024
Interpret: YOY Growth Rate=1,02
For every $100 obtained in profit last year (2024), an additional $2 was made this year (2025)
Formula: Current Ratio = Current Assets / Current Liabilities
Interpret: Current Ratio=0,92
The company has $0,92 in current assets for every $1 of debt or current liabilities.
Criteria: Efficiency
Formula: Asset Turnover = Net sales / Average total assets
Interpret: Asset Turnover=1,2
The company generates $120 in revenue for every $100 of assets owned/…$100 invested in assets.
Formula: Gross profit = Sales – Cost of goods sold (COGS)
Interpret: Gross profit=$131.900
The business has retained $131.900 after subtracting the direct costs of producing goods or services (COGS) from total revenue.
Formula: Contribution margin ratio = (Price – Variable cost) / Price
Interpret: Contribution margin ratio=0,22
For every $100 of revenue generated, $22 remain after covering variable costs to cover fixed costs and generate profit.
Formula: Return on Equity (ROE) = Net Income / Equity
Interpret: ROE=0,11
The company generates $11 of profit for every $100 of shareholders' equity
Formula: Quick Ratio (Acid-Test) = (Current Assets - Inventory) / Current Liabilities
Interpret: Quick Ratio=0,86
The company has $0,86 in highly liquid assets (cash, marketable securities, receivables) to cover every $1 of current liabilities.
Criteria: Efficiency
Formula: Inventory Turnover = Cost of goods sold (COGS) / Average inventory
Interpret: Inventory Turnover=3,4
The company sells and replaces its entire inventory 3,4 times during a year/month/day
Formula: Operating Profit = Gross profit – Operating expenses
Interpret: Operating Profit=$83.250
The business generates $83.250 from its core operations after paying for variable costs (COGS) and fixed overheads (rent, salaries, utilities), but before taxes and interest.
Formula: Break-Even Point (sales) = Fixed costs / Contribution margin ratio
Interpret: Break-Even Point (sales)=47.000
The company must generate exactly $47.000 in total revenue to cover all its costs, resulting in a net profit of $0.
Formula: Return on Sales (ROS) = Net Income / Revenue
Interpret: ROS=0,19
For every $100 in revenue, the company generates $19 in operating profit
Formula: Payback period = Initial investment / Annual cash flow
Interpret: Payback period=9,5
An investment takes 9,5 years to recover its initial cost through generated cash flows.
Criteria: Efficiency
Formula: Accounts Receivable Turnover = Net credit sales / Average Accounts Receivable
Interpret: Accounts Receivable Turnover=1,4
The company collects its average accounts receivable balance 1,4 times per year
Formula: Gross Profit Margin = (Gross profit / Sales)*100
Interpret: Gross Profit Margin=0,43
The company retains $43 in gross profit for every $100 of revenue generated.
The 57% of revenue goes toward the cost of goods sold (COGS), leaving 43% to cover operating expenses, interest, and net profit.
Formula: Break-Even Point (Units) = Fixed costs / (Sales price per unit – Variable cost per unit)
Interpret: Break-Even Point (Units)=432
The business must sell exactly 432 units of a product/service to cover all fixed and variable costs, resulting in zero profit or loss.
Formula: Return on Assets (ROA) = Net income / Average total assets
Interpret: ROA=0,26
The company generates $26 in net income for every $100 of assets owned.
Formula: Working Capital = Current Assets - Current Liabilities
Interpret: Working Capital=$2.654
The company has $2.654 more in short-term assets (cash, inventory, receivables) than immediate/short-term debts, showing basic liquidity to cover immediate expenses.
Criteria: Solvency (Leverage)
Formula: Debt-to-Equity Ratio = Total debt (liabilities) / Total equity
Interpret: Debt-to-Equity Ratio=1,04
The company has/uses $104 of debt for every $100 of equity