Profitability analysis involves examining various metrics to determine how well the business generates profit relative to its expenses. Key metrics include:
- Gross Profit Margin: This measures the percentage of revenue that exceeds the cost of goods sold (COGS). It indicates how efficiently a company produces its goods. - Net Profit Margin: This shows the percentage of revenue that remains as profit after all expenses have been deducted. It reflects overall profitability. - Return on Assets (ROA): This ratio measures how effectively a company uses its assets to generate profit. - Return on Equity (ROE): This ratio indicates how well the company uses investments to generate earnings growth.