Many investors are very concerned about the profitability of stocks. Profitable companies can both gain a stronger competitive advantage in the market and bring better potential returns to investors. How do you measure the profitability of a company? Here we list the 5 most commonly used metrics.

1. Gross profit

Gross profit is the ratio of gross profit to revenue, where gross profit is the company's revenue less direct costs, including raw material costs, manufacturing costs, production worker wages, etc. Companies with a higher gross margin than their peers generally have some competitive advantage. Gross margins of more than 40% are generally better.

2. Net Profit Ratio

The net profit ratio is the ratio of net profit to revenue, the ultimate profitability of a company's products and services, reflecting the company's business management capabilities and profitability levels. Companies with a higher net profit margin than their peers and have a higher margin of safety when the market is bad. A net profit margin of more than 20% is generally good by comparison.

3. Total Return on Assets (ROA)

ROA is the ratio of net profit to total assets, reflecting a company's ability to generate profit using all of its assets. It is a comprehensive measure of a company's asset utilization efficiency and overall profitability. ROA varies widely across industries, and ROA levels of more than 10% are generally better.

4. Net Return on Assets (ROE)

ROE is the ratio of net profit to net assets (shareholders' equity), reflecting the ability of a company to generate profits using its net assets. ROE, A COMPREHENSIVE REFLECTION OF A COMPANY'S NET PROFIT MARGIN, TOTAL RETURN ON ASSETS AND LEVERAGE LEVEL, IS ONE OF THE MOST CORE MEASURES OF PROFITABILITY AND IS ALSO THE MOST IMPORTANT MEASURE OF RETURN FOR SHAREHOLDERS. Companies or industries with a higher ROE often have a very strong competitive barrier. Over 20% ROE is a better level.

5. Profit and loss per share (EPS)

EPS is the net profit that can be allocated per ordinary share. A higher EPS usually means higher profitability, thereby attracting more investors. Wall Street analysts often use EPS to measure stock valuation and profitability, and to predict the EPS trend of stocks. The EPS of excellent companies is usually consistently high.