Last updated on April 18, 2023
The profitability ratios formula helps to quantify how profitable a company is from its business proceedings.
Profitability Ratios Formula
1. Dividends per Share (DPS) Formula
To get DPS, take the total dividends paid divide by the total number of ordinary shares.
Investors buy shares with the expectation of getting a return in terms of dividends from the company they have subscribed for its shares. To a company, paying dividends demonstrates that a company is financially strong to meet the interest of shareholders in the present and even in the future.
When divides have been paid, shareholders’ equity is reduced; thus, it is important to ensure that dividends are paid strategically. This is to pay substantial; income to shareholders and leave the financial muscles of a company intact for future growth sustainability of a company’s business activities. The sum a company has declared to be paid out for each outstanding ordinary share is called dividend per share (DPS).
| DPS = Total Dividends Paid ÷ Total Number of Ordinary Shares |
2. Earnings per Share (EPS) Formula
To get the EPS figure, take the company’s net income less dividends paid to preferred shares and divide the sum by the average outstanding shares of a company.
At the end of a particular accounting period, a company has to allocate some of its net profit to the outstanding shares in its common stock. There are five types of EPS: reported EPS, ongoing EPS, Pro-forma EPS, cash EPS, and headline EPS. EPS is a reliable measure of a company’s profitability for each ownership share.
| EPS = (Company’s Net Income – Dividends paid to preferred Shares) ÷ Average Outstanding Shares |
3. Price-Earnings Ratios Formula
To get a company’s price-earnings ratio, take the market price per share and divide by earning per share.
Before investors are convinced to buy a company’s shares, they scrutinize the past and expected future earnings from such stock.
If earnings are attractive to an investor, they make an actual purchase of the company’s shares. If the price-earnings ratio is high, investors will be willing to pay more to subscribe to the company’s shares and vice versa.
There are two types of price-earnings ratios: trailing and forward price-earnings ratios.
| P/E Ratio = Market Price per Share ÷ Earnings per Share |
4. Return on Equity (ROE) Formula
To get the ROE value of a company, take the net income of a company in a given period divide it by shareholders’ equity in the same period.
The extent to which a company is profitable in relation to the shareholders’ equity is referred to as return on equity. Investors use this figure to assess if a company efficiently uses shareholders’ equity in its business operations.
By comparing the return on equity for different companies in a given industry, investors gain insight into the most efficient company. This company will add the most value to the price shared on a subscription of shares by investors.
| ROE = Annual Net Income ÷ Shareholders’ Equity |
5. Return on Capital Employed (ROCE) Formula
To get the ROCE of a company, take Earnings Before Interest and Tax (EBIT) and divide the value by capital employed.
A given amount of operating income is attributed to every dollar a company has invested. The income attributed to each invested dollar is the return on capital employed. Investors will invest their money in a company with a high return on equity. This means such a company generates more income for each dollar of capital that the company has invested.
| ROCE = EBIT ÷ Capital Employed Where, Capital Employed = Total Assets – Current Liabilities |
6. Return on Assets (ROA) Formula
When calculating ROA, take the company’s net income and divide it by total assets.
The efficiency of using assets in revenue generation differs from one company to another. A company could have a higher value of total assets and fail to generate reasonable revenue. Another company could have slightly lower total assets and generate more revenue even with limited assets.
Investors use these as a barometer to assess how optimal a company utilizes its assets to generate revenue, hence earning and growth.
| ROA = Company’s Net Income ÷ Total Assets |
7. Gross Profit Margin Formula
A company’s gross profit margin is arrived at by taking net sales less Cost of Goods Sold (COGS) and the sum divided by net sales.
The amount of sales a company has remained with after deducing the sales costs is very important. It shows the ability of a company to pay other direct and indirect expects and the likely net income to be earned. The higher the gross profit margin of a company in its industry of operation, the better.
| Gross Profit Margin = (Net Sales – COGS) ÷ Net Sales |
8. Net Profit Margin Formula
The profit margin is calculated by taking the value of net profit and divide it by net sales.
The net profit is the amount left after deducting all the business costs in a certain accounting period. To a company and investors, a higher net profit margin is desirable. This shows that a company efficiently converts sales from business proceeds into profits. A company with a higher net profit adds more value to shareholders’ equity, and growth odds are in its favor.
| Net Profit Margin = Net Profit ÷ Net Sales |
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