D. Profitability Ratios Profitability refers to the company’s ability to generate earings. It is one of the most important goals of businesses. The profitability ratios ara: Return on equity measures the amount of net income earned in relation to stockholders’ equity ROE (return on equity) = Net income = Stockholders’ equity Retum on assets measures the ability of a company to generate income out of its resources/assets 2 ROA (return on asset) = Operating income = Total assets Gross profit margin shows how many pesos of gross profit is eared for every peso ot sale. It provides information regarding the ability of a company to cover its manufacturing cost from its sales. Remember that gross profit is just sales less cost of goods or cost of services. ‘© Gross profit margin = Gross profit = Sales Operating profit margin shows how many pesos of operating profit is eamed for every peso of sale. It measures the amount of income generated from the core business of a company. 2 Operating profit margin =Operating income = Sales Net profit margin measures how much net profit a company generates for every peso of sales or revenues that it generates. © Net profit margin = Net income = SalesE. Market Ratios Market ratios rotate tho firm's market value, as measured by its currant shars price, to cortain accounting values. These ratios give insight into how investors in the marketplace feel the firm is doing in terms of risk and retum. We will not cover the different market ratios in this module