profitability ratios

Profitability ratios are the most widely used ratios in investment analysis. They include the “margin” ratios, such as gross, operating and net profit margins. These ratios measure the firm’s ability to earn an adequate return. When analyzing a company’s margins, it is always prudent to compare them against those of the industry and its close competitors. Margins will vary among industries. Companies operating in industries where products are mostly “commodities” (products easily replicated by other firms) will typically have low margins. Industries that offer unique products with high barriers to entry generally have high margins. In addition, companies may hold key competitive advantages leading to increased margins.