# Definition of __Profitability ratios__

## Profitability ratios

**ratios** that focus on the **profitability** of the firm. Profit margins measure performance

with relation to sales. Rate of return **ratios** measure performance relative to some measure of size of the

investment.

# Related Terms:

**ratios** that measure how effectively the firm is managing its assets.

Also called financial leverage **ratios**, these **ratios** compare debt to total capitalization

and thus reflect the extent to which a corporation is trading on its equity. Capitalization **ratios** can be

interpreted only in the context of the stability of industry and company earnings and cash flow.

**ratios** that are designed to measure the relative claims of stockholders to earnings

(cash flow per share), and equity (book value per share) of a firm.

**ratios** used to test the adequacy of cash flows generated through earnings for purposes of

meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.

A range of payout **ratios** that is typical based on an analysis of comparable firms.

Payout **ratios** that are consistent with the availability of excess funds to make

cash dividend payments.

Related: capitalization **ratios**.

Measures of the relative contribution of stockholders and creditors, and of the firm's ability

to pay financing charges. Value of firm's debt to the total value of the firm.

**ratios** that measure a firm's ability to meet its short-term financial obligations on time.

**ratios** that measure a firm's ability to meet its short-term financial obligations on time.

**ratios** that relate the market price of the firm's common stock to selected financial

statement items.

**ratios** based on sales revenue for a period. A measure of

profit is divided by sales revenue to compute a profit ratio. For example,

gross margin is divided by sales revenue to compute the gross margin

profit ratio. Dividing bottom-line profit (net income) by sales revenue

gives the profit ratio that is generally called return on sales.

The present value of the future cash flows divided by the initial investment. Also called

the benefit-cost ratio.

See cash value added.

A method for determining the **profitability** of an investment. It is

calculated by dividing the present value of the future net cash flows

by the initial cash investment.

## profitability index

Ratio of net present value to initial investment.

## profitability index (Pl)

a ratio that compares the present value of net cash flows to the present value of the net investment

## Rate of return ratios

**ratios** that are designed to measure the **profitability** of the firm in relation to various

measures of the funds invested in the firm.

## Reserve ratios

Specified percentages of deposits, established by the Federal Reserve Board, that banks must

keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks.

## Risk-adjusted profitability

A probability used to determine a "sure" expected value (sometimes called a

certainty equivalent) that would be equivalent to the actual risky expected value.

## Short-term solvency ratios

**ratios** used to judge the adequacy of liquid assets for meeting short-term

obligations as they come due, including

1) the current ratio,

2) the acid-test ratio,

3) the inventory turnover ratio, and

4) the accounts receivable turnover ratio.

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