How do companies use profitability ratios?

Companies use profitability ratios primarily to measure business profitability. These ratios provide insights into how efficiently a company generates profit relative to its revenue, assets, or equity. By calculating ratios such as net profit margin, return on assets, and return on equity, businesses can assess their overall financial health and performance. This information is crucial for internal management to make informed decisions regarding operations, investments, and cost management strategies.

Understanding profitability also helps stakeholders, including investors and creditors, evaluate the business's potential for growth and returns on investment. Therefore, the focus of profitability ratios is specifically on analyzing and understanding profitability rather than aspects like liquidity, stock price projections, or employee performance evaluation.