Most of your stakeholders are directly interested in knowing how well you’re doing in terms of profit generation. A healthy profit generation indicates that your company has good financial health, is doing great in terms of sales, and can pay out a decent dividend. Profitability ratios also tell you the extent to which your sales revenue exceeds the cost of goods sold.
There are three main types of profitability ratios: gross profit margin, net profit margin, and operating profit margin. Gross profit margin compares the total gross profit that your company has earned compared to the sales revenue. On the other hand, the net profit margin considers the total net profit and operating profit margin divides the operating profit by total sales amount.
These types of ratios indicate whether a company’s operations can help generate a higher rate of return than the interest rate on its debt. Too much debt can cause a significant dip in the leverage ratios. Similarly, too little debt indicates the company’s inability or reluctance to borrow.
Do you need help calculating your company’s financial ratios? Duggal Professional Corporation from Edmonton can help you. We are a full-service accounting firm that will help you stay on top of your financial ratio requirements. Our additional services include business consultancy and reporting, startup planning, bookkeeping, and payroll services. Take a look at our tax and accounting services online.