Profitability Metrics
Profitability metrics measure how effectively a company converts sales, assets, or capital into profit. They're most useful compared against a company's own history and its direct competitors, not in absolute isolation.
Return on Equity, ROE
Net income ÷ Shareholders' equity × 100
Shows how efficiently a company turns the capital shareholders have put in into profit.
Strengths: A widely followed measure of shareholder-level profitability — famously emphasized by investors like Warren Buffett.
Watch out for: Can be inflated simply by taking on more debt (leverage), so it should always be checked alongside the equity ratio.
Combine with: Equity ratio, ROA, and PBR.
Return on Assets, ROA
Net income ÷ Total assets × 100
Shows how much profit a company generates from its entire asset base, including the portion funded by debt.
Strengths: Less affected by how much debt a company carries, so it isolates the efficiency of the underlying business.
Watch out for: Asset intensity varies enormously by industry, so ROA isn't very useful for comparing companies across sectors.
Combine with: ROE (the gap between the two shows how much leverage is contributing to shareholder returns).
Return on Invested Capital, ROIC
NOPAT (after-tax operating profit) ÷ Invested capital (debt + equity) × 100
Measures the return generated on all capital committed to the business — both borrowed and shareholder capital.
Strengths: Comparing ROIC to the cost of capital (WACC) shows whether a company is genuinely creating value, not just generating accounting profit.
Watch out for: The calculation is more involved than ROE/ROA, and different analysts adjust the inputs differently, so figures aren't always directly comparable.
Combine with: WACC (weighted average cost of capital) and EVA.
Operating Margin
Operating profit ÷ Revenue × 100
The most basic measure of how much profit the core business generates from each dollar of sales.
Strengths: Directly reflects the earning power of the core business and works well for comparisons within an industry.
Watch out for: Normal levels vary widely by industry, so cross-industry comparisons are misleading.
Combine with: Revenue growth rate and gross margin.
Ordinary Income Margin
Ordinary income ÷ Revenue × 100
A Japan-standard-accounting measure that adds non-operating financial income and expenses (like interest) to operating profit before calculating the margin.
Strengths: Captures overall profitability including financing activity, not just the core operating business.
Watch out for: The concept of 'ordinary income' doesn't exist under IFRS, so it can't be used to compare against IFRS-reporting companies.
Combine with: Operating margin (a large gap signals a significant financial income/expense effect worth investigating).
Net Profit Margin
Net income ÷ Revenue × 100
The final, bottom-line profit margin after taxes and one-off items.
Strengths: A concise summary of ultimate profitability.
Watch out for: Can swing significantly due to one-off gains or losses (like an asset sale), which can obscure the underlying trend in the core business.
Combine with: Operating margin (a large divergence suggests a one-off item is at play).
Gross Margin
Gross profit (Revenue − Cost of goods sold) ÷ Revenue × 100
The most 'upstream' profitability measure, reflecting the profitability of the product or service itself.
Strengths: Tends to reflect pricing power and brand strength.
Watch out for: Says nothing about SG&A costs (marketing, salaries, etc.), so it must be checked against the final profit margin separately.
Combine with: SG&A ratio and operating margin.
EBITDA Margin
EBITDA ÷ Revenue × 100
Shows profitability closer to a cash basis, stripping out depreciation, interest, and tax.
Strengths: Useful for comparing businesses with different capital structures or depreciation policies.
Watch out for: Ignores the real burden of capital expenditure, so it can flatter capital-intensive businesses.
Combine with: Operating margin and free cash flow.
Contribution Margin
Contribution margin (Revenue − Variable costs) ÷ Revenue × 100
A managerial-accounting measure of how much each additional unit of sales contributes to covering fixed costs and generating profit.
Strengths: Useful for break-even analysis and estimating the profit impact of a change in sales volume.
Watch out for: Hard to calculate precisely from public financial statements alone, since it requires splitting costs into fixed and variable components.
Combine with: Break-even revenue and the level of fixed costs.