Financial Statement Analysis
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Profit Margin Formula
- Profit Percentage Formula
- Profit Formula
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBITDA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Equity Ratio
- Return on Capital Employed (ROCE)
- ROCE Formula (Return on Capital Employed)
- Return on Invested Capital (ROIC)
- Return On Investment (ROI)
- Rate of Return on Investment
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Total Assets Formula
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup Percentage Formula
- Ratio Analysis (17+)
- Liquidity Ratios (29+)
- Turnover Ratios (17+)
- Efficiency Ratios (7+)
- Dividend Ratios (9+)
- Debt Ratios (26+)
Profitability ratios formula helps in determining and evaluating the ability of the company to generate the income against the expenses in incurs and takes into account the different elements of Balance Sheet and Profit and loss account of the company for analyzing the performance of the company.
Table of Contents
List of Profitability Ratios Formula
There are different types of profitability ratios which are being used by companies in order to track their operating performance. However, in this article, we will be discussing the margin based profitability ratios. Three major profitability ratios in this list are gross profit margin, net profit margin and EBITDA margin which we will be covered here.
#1 – Gross Profit Margin Ratio
The gross profit is calculated by deducting all the direct expenses called cost of goods sold from the sales revenue. The cost of goods sold primarily includes the cost of raw material and the labour expense incurred towards the production. Finally, the gross profit margin is calculated by dividing the gross profit by the sales revenue and is expressed in terms of percentage.
Below is the formula to calculate this Profitability Ratio.
#2 – Net Profit Margin Ratio
The net profit which is also called profit after tax (PAT) is calculated by deducting all the direct and indirect expenses from the sales revenue. Then, the net profit margin is calculated by dividing the net profit by the sales revenue and is expressed in terms of percentage.
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Below is the formula to calculate this Profitability Ratio
#3 – EBITDA Margin Ratio
The EBITDA is calculated by adding back interest expense, taxes, depreciation & amortization expense to net profit or PAT. Then, the EBITDA margin is calculated by dividing the EBITDA by the sales revenue and is expressed in terms of percentage.
Explanation of the Profitability Ratios Formula
#1 – How to Calculate Gross Profit Margin?
The formula for gross profit margin can be calculated by using the following steps:
- Step #1: Firstly, the sales revenue is taken from the profit and loss account.
- Step #2: Then, the cost of goods sold is calculated which is the summation of raw material consumed, labor expense and other similar direct expense attributable to the manufacturing of the product. All the information is easily available from the profit and loss account.
- Cost of Goods Sold = Raw Material Cost + Labor Expense + Other Direct Expense
- Step #3: Now, the gross profit is calculated by deducting the cost of goods sold from the sales revenue.
- Step #4: Finally, the gross profit margin is calculated by dividing the gross profit by the sales revenue and multiplied by 100%.
- Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue * 100%
#2 – How to Calculate Net Profit Margin?
The formula for Net Profit Margin can be calculated by using the following steps:
- Step #1: Firstly, the sales revenue is calculated as described above.
- Step #2: Then, the net profit (PAT) is captured which is categorically mentioned as a separate line item in the profit and loss account.
- Step #3: Finally, the net profit margin is calculated by dividing the net profit (PAT) by the sales revenue and multiplied by 100%.
- Net Profit Margin = PAT / Revenue * 100%
#3 – How to Calculate EBITDA Margin?
The formula for EBITDA Margin can be calculated by using the following steps:
- Step #1: Firstly, the sales revenue is calculated as described above.
- Step #2: Now, interest expense, depreciation & amortization expense and taxes paid are taken from the profit and loss account.
- Step #3: Then, EBITDA is calculated by adding back interest expense, depreciation & amortization expense and taxes paid to PAT.
- EBITDA = PAT + Interest + Taxes + Dep & Amort
- Step #4: Finally, the EBITDA margin is calculated by dividing the EBITDA by the sales revenue and multiplied by 100%.
- EBITDA Margin = EBITDA / Revenue * 100%
Examples of Profitability Ratios Formula (with Excel Template)
Below we have taken some practical examples to understand Profitability Ratios Formula.
Let us consider an example to calculate the profitability ratios for a company called XYZ Limited. XYZ Limited is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, XYZ Limited has earned $150,000 in total net sales along with the following expenses.
In below template is the data for the calculation-
From the given information,
#1 – Gross profit
= Net sales – Cost of goods sold
So form the above calculation, gross profit will be:
#2 – Net profit = $31,000
#3 – EBITDA
= Net profit + Interest expense + Tax + Depreciation expense
So from the above calculation EBITDA will be:
Now, the Profitability Ratios,
- Gross profit margin
- = Gross profit / Net sales * 100
- Net Profit margin,
- = Net profit / Net sales*100%
- EBITDA margin
- = EBITDA / Net sales*100%
Profitability Ratios Formula in Excel (with excel template)
Now let us take the real-life example of Apple Inc. to illustrate the different profitability ratios in excel template below. The table provides the detailed calculation using different profitability ratio formulas
We note the following about profitability ratios of Apple
- Net Profit Margin has increased from 21.19% in 2016 to 22.41% in 2018
- Gross profit margin, on the other hand, has decreased from 39.08% to 38.34%
- Likewise, EBITDA margin has decreased from 34.01% to 32.77%
Relevance and Use of Profitability Ratios Formula
- The formula profitability ratios are basically used to assess how a company is performing which is calculated by measuring profitability at different level i.e.Gross, PAT and EBITDA.
- These ratios show the percentage of sales that is absorbed by the operating expense at the different levels. Hence, the lower the operating expense ratio, the higher will be the profitability which will indicate better performance.
- However, there remains a limitation of the profitability ratio formula as it is useful only when comparing companies in the same industry.
This has been a guide to Profitability Ratios Formula. Here we discuss how to calculate Profitability Ratios (Gross Margin, Net Margin, EBITDA Margin) using practical examples and downloadable excel template. You can learn more about financial analysis from the following articles –