How effectively does a business turn activity into earnings? Profitability ratios answer that question. Common examples include gross margin, operating margin, net profit margin, return on assets, and return on equity. Each expresses profit relative to revenue, assets, or equity, allowing comparison across companies and over time.

High profitability ratios generally indicate pricing power, cost control, or efficient use of capital. Low ratios may signal competitive pressure, operational inefficiency, or a deliberate investment phase. Industry norms differ widely; a supermarket operates on thin margins while a software firm may enjoy much higher ones.

Analysts and managers use profitability ratios to diagnose performance, set targets, and evaluate the impact of strategic decisions. Because the ratios are derived from accounting numbers, they are subject to the same limitations and judgment calls as the underlying statements. Still, they remain among the most widely examined indicators of business health.