Profitability ratios are calculated to analyse the earning capacity of the business, which is the outcome of utilisation of resources employed. They refer to the analysis of profits in relation to revenue from operations or funds (or assets) employed in the business.

The various ratios commonly used to analyse profitability include Gross Profit Ratio, Operating Ratio, Operating Profit Ratio, Net Profit Ratio, Return on Investment (ROI) or Return on Capital Employed (ROCE), Return on Net Worth (RONW), Earnings per Share, Book Value per Share, Dividend Payout Ratio, and Price Earning Ratio.

The Gross Profit Ratio is computed as a percentage of revenue from operations to have an idea about the gross margin. The Operating Ratio is calculated to analyse the cost of operation in relation to revenue from operations. It is worked out as: (Cost of Revenue from Operations + Operating Expenses) / Net Revenue from Operations. Operating expenses include office expenses, administrative expenses, selling expenses, etc., while excluding non-operating incomes and expenses.

The Operating Profit Ratio is calculated to reveal the operating margin. It may be computed as 100 minus Operating Ratio. Alternatively, it is calculated as Operating Profit / Revenue from Operations, where Operating Profit equals Revenue from Operations minus Operating Cost. A lower operating ratio is considered a healthy sign.