Profitability and Coverage Analysis
4. Table of profitability financial ratios, formulas and interpretation
All profitability ratios which we discussed in this tutorial are summarized in the table below:
PROFITABILITY
RATIOS 

RATIO 
FORMULA 
APPLICABILITY 
Return on Sales (ROS) 
Operating Profit ÷ Total Sales 
Measures how much profit a company generates per dollar of sales. 
Important 
When evaluating and analyzing the return on sales, it is important to consider the following factors:


Return on Assets (ROA) 
Net Profit before Taxes ÷ Total Assets 
Measures how effectively a company utilizes assets available to generate profits. 
Important 
The following factors should be taken into account, when evaluating ROA ratio:


Return on Equity (ROE) 
Net Income (after Taxes) ÷ Average Shareholder's equity 
Measures how effectively a company employs resources provided by owners (i.e., shareholder’s equity) in generating earnings. 
Important 
The return on equity ratio can be a misleading measure of profitability in some circumstances:


Return on Investment (ROI) 
(Gain from Investment – Cost of Investment) ÷ Cost of Investment 
Evaluates the profitability of an investment in relation to the invested capital. 
Important 
When evaluating the return on investment ratio, it is important to consider the following factors:


Return on 
Income before Taxes ÷ Capital Employed 
Measures how efficiency and profitably a business operates with the capital employed. 
Important 
One of the limitations of return on capital employed is the fact that it does not account for the depreciation and amortization of the capital employed. Because capital employed is in the denominator, a company with depreciated assets (e.g., an older company) may find its ROCE increase without an actual increase in profit. 

Earnings before Interest and Taxes (EBIT) 
Revenue – Cost of Goods Sold – Operating Expenses + Nonoperating Income 
An indicator of a company’s profitability before interest and income tax expenses. 
Important 
If the company does not have nonoperating income, EBIT is also called operating profit because it shows a company’s earnings from ordinary operations. 

EBITDA 
EBIT + 
An indicator of company’s profitability before interest, income tax expenses, depreciation and amortization. 
Important 
EBITDA is a nonGAAP (Generally Accepted Accounting Principles) measure of profitability. It can be a misleading measure of profitability in many circumstances, for example:
