Finally, let’s look at the profitability ratios. These ratios measure the company’s earning power and management’s effectiveness in running operations.
Gross margin, also called the gross profit margin, is the first profitability ratio we examine. The gross margin measures the effectiveness of the company’s production management.
Gross margin = Gross income ÷ Sales
Gross income and sales are found on the income statement.
Gross margin is gross income as a percentage of sales. This ratio measures the effectiveness of production and is calculated by dividing gross income by sales.
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