# Understanding Profitability Ratios: A Practical Guide for Investors

The profitability ratio is a tool used by investors and business owners to measure how efficiently a company generates profit. There are 5 main types to be aware of:

**1. Gross Profit Margin** = (Revenue - COGS) / Revenue × 100%
Shows the percentage of revenue remaining after production costs. The higher, the better.

**2. Operating Profit Margin** = Operating Profit / Revenue × 100%
Measuring the operational efficiency of core business.

**3. Net Profit Margin** = Net Income / Revenue × 100%
The most important ratio—shows what percentage of revenue actually becomes profit after all expenses.

**4. Return on Assets (ROA)** = Net Income / Total Assets × 100%
Measuring how well a company's assets generate profit.

**5. Return on Equity (ROE)** = Net Income / Shareholders' Equity × 100%
Showing the return received by investors on their capital.

**How to Use:**
Compare the company's ratios with competitors and industry standards. Analyze trends over several periods to see if profit margins are increasing or decreasing. Combine with other financial metrics for a complete picture.

**Note:** This ratio is limited to accounting—it does not capture external factors such as macroeconomic conditions or specific industry challenges.