Profitability Ratios: Types, Formulas, and Examples

Profitability ratios basically tell you how well a company turns revenue, assets, or equity into profit, in a sort of efficient way. They are usually split into two categories: margin ratios like gross profit, operating profit, net profit, and EBITDA. And then return ratios such as ROE, ROA, and ROCE. Most investors use these figures to contrast firms and sort of spot the financially strong stocks early, before investing.

When you look at a company’s financials, revenue by itself tells you, honestly, very little. Two companies might report Rs 1,74,000 crore in revenue, but one could be just barely scraping by, while the other keeps Rs 14,000 crore as profit. 

Profitability ratios are what help you catch that gap in seconds. In this guide, you’ll learn each major profitability ratio (and the exact formula) plus how Indian companies, say Infosys and Maruti Suzuki, stack up across every metric using their FY26 results.

What Are Profitability Ratios?

Profitability ratios are basically financial measures that indicate how well a company makes a profit in relation to its revenue, assets, or equity. Every investor, even a beginner or a seasoned analyst, tends to use these ratios to check whether a business is genuinely earning money, not only extending its top line.

These ratios are important because companies publish profit figures in absolute terms (Rs crore). And honestly, those numbers are pretty hard to compare when companies come in different sizes. So the ratios translate the same results into percentages, and then comparisons feel more level and actually meaningful. 

For example, a company showing Rs 500 crore net profit might look great at first glance, but if its revenue is around Rs 50,000 crore, then its net profit margin becomes only 1%.  

SEBI-registered research analysts often reference profitability ratios in their stock recommendations, as a sort of quick screening step before they start any deeper valuation work.

Types of Profitability Ratios

Profitability ratios kind of split into two groups, not always perfectly, but close enough. Margin ratios talk about how much profit the company pulls from each rupee of revenue. Meanwhile, return ratios measure, in a way, how nimbly the business makes use of its capital like equity, assets, or even total invested funds, to bring about that profit.

Data sourced from standard financial analysis frameworks (NSE/BSE investor education materials). Last updated: June 2026.

Margin Ratios:  Formulas and Examples

Margin ratios are kind of calculated directly from the income statement, and they sort of show you how much of each rupee you made from sales stays around after various layers of costs are deducted, like after operating and other charges.

Gross Profit Margin

Gross profit margin kinda shows the profit that's left after you take away the direct cost of making or delivering a product (COGS, Cost of Goods Sold). It sort of implies pricing power, and also production efficiency, you know, in a general way.

Formula: (Revenue - COGS) / Revenue x 100

Example: If a company earns Rs 10,000 crore in revenue and its COGS is Rs 6,000 crore, the gross profit is Rs 4,000 crore. Gross profit margin = 40%.

A high gross profit margin kinda means the company is keeping control over its production costs pretty well. Like for IT companies such as Infosys, gross margins are usually above 30%, because the biggest expense is mainly employee salaries and not raw materials, you know.

Operating Profit Margin

Operating profit margin, also called EBIT margin, kind of shows how much profit comes out after covering production costs plus everyday operating expenses like rent, salaries, and marketing, you know, but it stays before interest and taxes hit. In other words, it’s more or less a signal of the business's core operational efficiency.

Formula: EBIT / Revenue x 100

Where EBIT = Earnings Before Interest and Tax

Example: Infosys reported an adjusted operating margin of 21.0% for FY26 (Source: Infosys FY26 results announcement, NSE filing, April 2026). This means for every Rs 100 of revenue, Infosys kept Rs 21 as operating profit, a consistent and healthy figure for an IT major.

Net Profit Margin

Net profit margin is probably the most widely watched ratio. It gives the percentage of revenue that turns into the last kind of profit for shareholders, like PAT, Profit After Tax, once all expenses, interest, and taxes are settled.

Formula: Net Profit (PAT) / Revenue x 100

 Infosys reported a net profit of Rs 29,474 crore on revenue of Rs 1,78,650 crore in FY26 (Source: Screener. in, BSE filing data, FY26). Net profit margin = approximately 16.5%.

Maruti Suzuki, working in the auto sector where raw material costs keep climbing, reported net profit of Rs 14,445 crore on net sales of Rs 1,74,369 crore in FY26. (Source: Maruti Suzuki FY26 results, BSE filing, April 2026). So the net profit margin ends up around 8.3%.

This comparison, like i t were instructive on its own. Two similarly-sized companies (by revenue), but their margins are very different because the cost structures are kind of fundamentally different, yeah.

EBITDA Margin

EBITDA margin is meant to show operating performance before interest, taxes, depreciation, and amortisation, so it sort of feels like a cleaner view of how the core business is doing. Analysts rely on it to line up operational health across companies that have different debt loads or maybe different depreciation policies, because it removes those distortions, sort of like smoothing out the noise.

Formula: EBITDA / Revenue x 100

You can find EBITDA figures in the income statement or notes to accounts of any BSE/NSE filing.

Example: Maruti Suzuki reported an Operational EBITDA of Rs 21,450 crore in FY26, giving an EBITDA margin of approximately 12.3% on net sales of Rs 1,74,369 crore (Source: Maruti Suzuki FY26 results press release, BSE, April 2026). This was a decline from 13.9% in FY25, driven by rising material and employee costs, a red flag that analysts quickly flagged.

Cash Flow Margin

Cash flow margin measures, kind of, how much actual cash a business pulls per rupee of revenue. It’s different from net profit because cash is harder to tune or nudge through accounting choices, you know, less easy to play around with on paper.

Formula: Operating Cash Flow / Revenue x 100

Infosys racked up free cash flow of $3,733 million in FY26, which is more than 100% FCF conversion of net profit, so you could see it as a sign of real cash quality (Source: Infosys FY26 results press release, April 2026).

When a company’s cash flow margin follows its net profit margin pretty tightly, it usually means earnings quality is solid, not just on paper.

Return Ratios: Formulas and Examples

When you talk about return ratios, you’re kind of answering a different question, you know, not “how profitable is the business from its sales,” but instead like “how well is it deploying its capital” in real life. So you can have two companies with the same margins, yet their return ratios look very different, and that’s mostly because one is more asset-heavy or more debt-heavy, rather than anything magic going on.

Return on Equity (ROE)

ROE kind of measures how much profit a company can create per rupee of the shareholders' equity, and it is one of those ratios that stock investors tend to watch really closely.

Formula: Net Profit / Shareholders' Equity x 100

Example: Infosys reported an ROE of 34.81% for FY26 (Source: MarketsMojo analysis of BSE filing, April 2026). This significantly exceeds the company's own five-year average ROE of 31.88%, indicating improved capital efficiency.

A general benchmark: ROE above 15% is considered good for most sectors. Above 25% signals a competitively strong business.

For a deeper breakdown of how ROE and ROCE differ in their interpretation, read the difference between ROE and ROCE, especially important when comparing companies across capital-intensive and asset-light sectors.

Return on Assets (ROA)

ROA kinda measures how efficiently a company uses its total assets, both equity-funded and debt-funded, to end up generating profit. It is particularly handy, though, when you are comparing firms with different debt setups, because the whole thing stays sort of fair even if their financing styles are different.

Formula: Net Profit / Total Assets x 100

Example: Maruti Suzuki's ROA stood at approximately 11.3% in FY25 (Source: Equitymaster Annual Report Analysis, FY25). A high ROA for an auto manufacturer like Maruti, which owns factories, land, and equipment, reflects strong asset utilisation relative to its peers.

Return on Capital Employed (ROCE)

ROCE is arguably the most important ratio for fundamental analyst types in India. It measures the profit that is generated on all the capital that the business uses, both the equity and the debt, kinda together.

Formula: EBIT / Capital Employed x 100

Where Capital Employed = Total Assets - Current Liabilities

Example: Infosys reportedly logged a ROCE of 55.71% for FY26, which is way above its own five-year average of 50.97% (Source: MarketsMojo, BSE filing data, April 2026). On the other hand, Maruti Suzuki kept a ROCE of about 20.6% in FY25 (Source: Maruti Suzuki Annual Report Analysis, FY25), which is a fairly solid number for a capital-heavy auto kind of business.

Return on Invested Capital (ROIC)

ROIC is a refined version of ROCE. It measures returns only on the capital that is actively invested in the business, excluding non-operating cash holdings.

Formula: NOPAT / Invested Capital x 100

Where NOPAT = Net Operating Profit After Tax

ROIC is used by institutional investors to identify companies that are creating real value above their cost of capital. If ROIC consistently exceeds WACC (Weighted Average Cost of Capital), the company is building shareholder value.

Profit Volume Ratio (PV Ratio) : Formula and Example

The Profit Volume Ratio PV ratio basically measures how contribution (like revenue minus variable costs) relates to sales. It kind of shows what percentage of each rupee of sales goes toward covering fixed costs, and at the same time generating profit.

Formula: PV Ratio = (Contribution / Net Sales) x 100

Where Contribution = Net Sales - Variable Costs

Example: A manufacturing company has sales of Rs 500 crore and variable costs of Rs 300 crore. Contribution = Rs 200 crore. PV Ratio = (200 / 500) x 100 = 40%.

A higher PV ratio means the business covers its fixed costs faster and reaches profitability sooner as volumes increase. The PV ratio is widely used in management accounting and break-even analysis. For retail investors, it is most relevant when analysing small-cap manufacturers or consumer goods companies where cost structure drives profitability at different volumes.

India Sector-Wise Profitability Benchmarks (FY26)

One of the most common slip-ups investors make is looking at a margin by itself only. A net profit margin at 8% is kind of poor for an IT business, but it can be excellent for a grocery retailer. Sector context matters a lot, like honestly, it does.

Data sourced from BSE/NSE company filings. Last updated: FY26 (March 2026).

Why the gap? IT firms like Infosys tend to have very few physical assets, really. In general, their big expenses are just salaries and that kind of thing. After revenue starts climbing, the profit margins expand quite fast, almost like clockwork.  

Then you have auto makers, such as Maruti, that operate huge manufacturing facilities, keep a lot of inventory on hand, and they’re also dealing with raw material price swings. Because of that, margins get squeezed more often, and it’s not as smooth.

This is why you should never compare the net profit margin of a bank with a software company. Every sector has its own margin benchmark, and the best practice is to compare a company with its closest peers.

How to Use Profitability Ratios to Pick Stocks

Knowing formulas is one thing. Actually using them in real stock research, that’s what tends to create the edge for investing. Below is a bit of a structured approach most fundamental analysts follow.

Step 1: Check the margin trend over 3-5 years. A company with a net profit margin of 12% today but 18% three years ago is losing pricing power or efficiency. One year of data is noise. A trend is a signal.

Step 2: Compare with sector peers. Pull margin and return ratios for the top 3-5 companies in the same sector. A stock screening tool helps filter by net profit margin and ROE to quickly surface the most profitable businesses in any sector.

Step 3: Apply the ROE benchmark. Most quality-focused investors in India require a minimum 3-year average ROE of 15% or higher before considering a stock. Infosys's 3-year average ROE of 30.8% easily clears this bar (Source: Screener. in, BSE data, FY26).

Step 4: Watch for divergence between revenue and profit growth. Maruti Suzuki's FY26 result showed a key red flag: revenue grew 20.2% but net profit grew only 1%. EBITDA margin fell from 13.9% to 12.3%. Revenue growth without profit growth is a warning sign worth investigating.

Step 5: Cross-check with cash flow margin. If a company's net profit margin is 15% but its cash flow margin is only 5%, earnings quality is low. Cash is harder to manipulate than accounting profit.

Common investor mistake: Comparing net profit margins across sectors. An FMCG company at 10% margin and an IT company at 10% margin are in completely different situations. FMCG operates on high volumes and thin margins by design. Always compare within the same sector.

Conclusion

Profitability ratios give you, in a kind of quick, messy way, a structured method to see if a company is really turning its normal business work into actual profit. Margin ratios (gross operating net EBITDA) kinda show you how well the company controls costs, you know, how efficiently expenses get managed.

Return ratios (ROE, ROA, ROCE, ROIC) talk about how adroitly it puts capital to work. When you use them together, they basically give a whole image of financial sturdiness, before you go any further with stock research.

For Indian retail investors, the starting point is almost always net profit margin and ROE; these two numbers do a pretty solid job of separating strong businesses from the average ones fast. Take a firm like Infosys, which has 55.71% ROCE and 34.81% ROE in FY26, and it sets a pretty high bar for what capital efficiency should look like. Your task is then to track down businesses with that same kind of strength, but at valuations that feel reasonable.

Disclaimer: This article is for educational purposes only. It does not constitute investment advice. Please consult a SEBI-registered financial advisor before making investment decisions.

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