The profitability ratios assess a company’s ability to earn profits on sales, assets and equity. These financial ratios are useful to measure a company’s performance. These ratios are considered to be favorable when they improve over a trend line or are comparatively better than the results of competitors.
When using profitability ratios, it is best to compare a company’s results for the current period to the results for the same period in the preceding year. The reason is that many organizations have seasonal sales, which causes their profitability ratios to vary considerably over the course of a year e.g. Christmas and Chinese New Year.
Value investors in Singapore often use these ratios widely in their due diligence check. Therefore, they are critical to determining the attractiveness of investing in company shares as well. Likewise, they are also useful to business owners in three ways:
- Monitor company’s performance.
- Making business decisions related to expansion or diversification
- Enabling lenders/investors to attain a clear picture of the business and access additional resources
For the benefit of our blog readers, let’s examine all the five profitability ratios which are namely gross profit margin, operating profit margin, net profit margin, return on assets (ROA) and return on equity (ROE). Check out our fundamental analysis section to find out more information about each of them.
How to leverage on Profitability Ratios?
Knowing in depth of the mechanism and leveraging on a system is important. To be a serious investor, you need to invest in education adequately. We provide our 3 days value investing bootcamp locally in Singapore. By learning the rules and apply them diligently after the bootcamp, a novice investor can be transformed to a savvy investor in due course.
Does it requires you to be mathematically inclined? Or does it require you to be an accountant or auditor? The answer is a No. Like many of our Value Investing Singapore graduates, most of us know nuts about company financials. But we have one thing in common, i.e. the skill and system to do smart value investing. All we have learnt is about a proven value investing system that works.
Start your learning journey by signing up our free Value Investing Singapore seminar now. Do not wait too late to get invested.