How to use Profitability Ratios

Key Note Company Reports provide Profitability Ratios for all UK companies who submit relevant accounting information to Companies House.

The Guide below shows what the Profitability Ratios of Return on total assets, Return on capital and Pre-Tax profit mean and how they can be used

Return on total assets

A percentage of the value of pre-tax profits in proportion to the value of total assets.

(Earnings before interest and tax) x 100 / Total assets

The higher the ratio the better as it indicates how effectively a company is using its assets to generate earnings.

Return on capital

The amount of pre-tax profit a business yields relative to the level of investment (capital employed).

Measures the return that an investment generates for shareholders.

(Pre-tax profit) x 100 / Capital employed

(Capital employed = non-current loans plus share capital and reserves).

Especially useful for companies that invest a large amount of capital. The higher the percentage the better as it indicates a greater return for investors. Good indicator of a company’s size and strength.

Pre-tax profit margin

The percentage of sales left as profits or losses before tax.

Earnings before tax x 100 / Total sales

The higher the pre-tax profit margin the more profitable a company is. A high margin shows how well management are controlling operating costs. Comparisons should be against companies within the same industry.