Question

explain the difference between profitability ratios and market ratios.

Original answer please

Answer 1

Profitability ratios measure the financial performance of an enterprise for a given time period.These ratios measure success or failure of an enterprise for a given time period. While market ratios enable a person to understand how other investors or outside world / market feel about the company or how do they value a company. Market ratios show the relationship between the price per share of the company and its earnings, growth rate, assets. Profitability ratios are calculated or are based on the company data / financials only while most market ratios contain the current market price of a share of common stock.

Some examples of profitability ratios are:

1. Net Profit margin ratio : Net income / Net sales : It indicates the profit rate.

2. Return on total assets; Net income / Average total assets: It indicates rate of return on total assets.

3. Return on common equity: Net income - preferred dividends / Average common equity: It measures returns accruing to common shareholders.

Some examples of market ratios are:

1. Price to earnings ratio: Market price per share / Diluted earnings per share: It indicates the investment potential of the company. A rise in this ratio indicates that investors are pleased with the company's opportunity for growth.

2. Dividend yield: Dividend per share / Market price per share; It indicates the relationship between dividend per share and market price per share.

3. Price to book ratio : Market price per share / Book value per share:It indicates whether you are paying too much for what would remain if the company went bankrupt immediately.