Gross Profit Margin

• The gross profit margin measures how efficiently a business controls the cost of goods sold. The calculation for gross profit margin is sale--cost of goods sold/sales. These items are found on a company's income statement. Generally, a larger gross profit margin shows stronger profitability for a company. However it is important to use the industry or type of business as a framework for this metric because gross profit margin varies significantly from industry to industry and business to business. For example, it is standard for the airline industry to have a low gross profit margin of around 5 percent, while the software industry has an average gross profit margin of 90 percent.
  
  

Operating Profit Margin

• Operating profit, also known as earnings before interest and taxes (EBIT), is found on a company's income statement. The operating profit margin is how much a company earns after paying variable expenses such as cost of goods sold, wages, and raw materials. The operating profit margin is calculated as EBIT/sales. A high operating profit margin indicates a business is efficient in controlling costs. It may also indicate a company's sales are increasing at a faster rate than costs.
  
  

Net Profit Margin

• Net profit margin is the margin ratio most used. It basically measures profitability by calculating how efficiently a company is run in terms of cost management compared to sales. The net profit margin is calculated as net profits after taxes/sales. The net profit margin gauges how much net income is generated from each sales dollar. For instance, if the net profit margin is 10 percent, then 10 cents of every dollar is net income. A higher net profit margin is desirable. Again, the industry will determine what ranges of the ratio are competitive for a business.
  
  

Return on Assets

• The return on assets ratio measures how well a company uses its assets to generate profits. Return on assets is calculated as net income/total assets. Net income comes from the income statement, while total assets come from the company's balance sheet. A higher return on assets is preferable because this indicates that the business is efficiently using its available resources, such as debt and investments, to help generate net income.
  
  

Return on Equity

• Return on equity is very important to the shareholders of the company. It assesses how effectively a company uses the shareholder's equity to generate net income. Return on equity is calculated as net income/shareholder's equity. Investors look closely at this ratio to determine if a company is investing the stockholders' money wisely. Investors look for a high return on equity for a company. In addition, investors also use return on equity as a tool to compare the profitability of one company to another.