Profitability Ratios

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Profitability Ratios

The ratios used to measure profitability provide information on how well a company can generate income from its business operations, and how these stand in relation to the assets or the capital employed. Amongst the different ratios, the gross margin and the profit margin are often analysed.

Gross margin

A key indicator for businesses, especially for the efficiency of a business, is the gross margin, which indicates how much money a business has left over after deducting direct costs from net sales. A higher gross margin means that a company has more capital left over to cover other costs or pay off debts. The gross margin can be used to calculate how much the company retains from 1 CHF of sales. So, with a gross margin of 45%, the company has made a gross profit of 0.45 CHF. Companies use their knowledge of gross margin to measure how production costs correlate with sales.

Profit margin

Of all the profitability ratios, profit margin is one of the most commonly used. The profit margin indicates the extent to which a company is profitable, i.e. whether it is making money or not. Figuratively speaking, like the gross margin, it shows how much is earned on 1 CHF, i.e. if the profit margin is 4 %, the company makes a net profit of 0.04 CHF per 1 CHF. The profit margin is considered a standard measure worldwide. It simply shows how much profit a company generates and clearly highlights this. A negative profit margin can mean that the company is not generating enough revenue or is having difficulty covering its costs.

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