## Financial Ratios

Operating profitability is a measure of profit in a company. It is used to measure a company's performance. Profitability is simply the capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs and expenses related to earning the income.

**Gross profit margin (GPM)**Gross Profit Margin = (Net sales - Cost of goods sold) / Net sales

**Operating margin (OM)**Operating profit margin = Operating income ÷ Total revenue

Operating Income = gross profit – operating expenses

**EBITDA Margin**It is a company's operating cash flow based on data from the company's income statement. It means earning before the deduction of interest expenses, taxes, depreciation, and amortization.

EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation and amortization)

**Pre-Tax Margin (EBT margin)**Pre-Tax Operating Income = Gross Revenue - Operating Expenses – Depreciation

**Net Margin**The amount of profit a business receives for each unit of sales is called as Net margin.

Net margin = net income/sales

**Contribution margin**Contribution margin means how much of a company's revenues will be contributing to the fixed expenses and net income.

Contribution margin = contribution/sales

**Asset Turnover Ratio**Asset turnover ratio is the measure of a company's sales to its assets. It is used to measure how efficiently the company is using its assets to generate revenue.

Total asset turnover ratio, fixed asset turnover ratio and working capital turnover ratio are come under the category of asset turnover ratio. In all cases the numerator is the same i.e. net sales (both cash and credit) but denominator is average total assets, average fixed assets and average working capital respectively.

**Total Asset Turnover Ratio**It measures the efficiency of a company to use its assets to generate sales. This ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets.

Total asset turnover = net sales /average total assets

**Fixed Turnover Ratio**Fixed-asset turnover = net sales /average net fixed assets

**Equity Turnover Ratio**Equity turnover is a ratio that measures the proportion of a company's sales to its stockholders' equity.

Equity turnover = net sales /average total equity

#### Operating Profitability Ratios

#### Operating Profitability Ratios