Profitability Ratios- Analyzing An Income Statement

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Profitability Ratios- Analyzing An Income Statement

Profitability reflects the final result of a company’s business operations. Profitability ratios are also called income statement ratios since most of the items used in their calculations are picked up from the income statement. Profit margin ratios and rate of return ratios are the most commonly used profitability ratios. A comparison of profitability ratios with other competitors in the same industry can reveal relative strengths or weaknesses of a business. read more

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Return On Assets Formula

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Return On Assets Formula

The return on assets formula, or RoA measures the efficiency of assets used in a business to generate profits. In simple terms, the return on assets formula will tell you what a company can do, with what its got. It is the most widely used profitability ratio when comparing companies in the same industry.

Return On Assets Formula

A low RoA when compared to the industry average indicates an inefficient use of business assets. However, a high RoA figure does not necessarily indicate that a company is using its assets efficiently. A company carrying highly depreciated and old assets will also have a high RoA figure. Also, since assets are carried at historical values, they remain understated during inflationary periods. Hence, RoA during times of high inflation may be misleading. read more

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