What Is Profitability Ratio? And Why We Use It?

Profitability ratios are used to evaluate the profitability of a company and it is important to measure the performance of a company. Profitability ratios are primarily used to determine the profit earned by a company relative to its sales, net worth and total assets. The three types of profitability ratios are as follows:

Return on Sales or Profit margin = Net Profit After Taxes ÷ Net Sales

Return on Assets or Profit margin = Net Profit After Taxes ÷ Net Sales

Return on net worth ratio = Net Profit After Taxes ÷ Net worth