Profitability ratios show how much of its sales a company keeps as profit, and how much profit it makes on the money invested in it. Companies that earn high returns year after year often have something competitors find hard to copy.
Margins
Gross margin is revenue minus the direct cost of the goods or services, as a share of revenue. Operating margin also subtracts running costs such as salaries, marketing and research. Net margin is what is left after interest and tax. Comparing margins over several years shows whether a company is gaining or losing pricing power.
Return on equity (ROE)
Net income divided by shareholders' equity. It shows the return on the owners' money. A high ROE can come from a strong business - or from a lot of debt, which shrinks equity and inflates the ratio, so always look at debt alongside it.
Return on invested capital (ROIC)
Operating profit after tax divided by all capital invested (equity plus debt). Because it includes debt, it is harder to flatter than ROE. A company whose ROIC is consistently above its cost of capital creates value as it grows.
This content is general information, not investment advice.