# Calculate the profitability of a business

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## Profitability ratios

The best way to determine whether you run a profitable business is by running margin ratios, also referred to commonly as profitability ratios. To run these figures, you’ll first need to calculate three things from your income statement:

1. Gross Profit = Net Sales – Cost of Goods Sold
2. Operating Profit = Gross Profit – (Operating Costs, Including Selling and Administrative Expenses)
3. Net Profit = (Operating Profit + Any Other Income) – (Additional Expenses) – (Taxes)

Gross Profit Margin Ratio = (Gross Profit ÷ Sales) × 100

Operating Profit Margin Ratio = (Operating Income ÷ Sales) × 100

Net Profit Margin Ratio = (Net Income ÷ Sales) × 100

Break-Even Point Sales = Fixed Expenses + Variable Expenses

Break-Even Point for Units Sold = Fixed Expenses ÷ (Unit Sales Price – Unit Variable Expenses)

Return on Assets = (Net Income Before Taxes ÷ Total Assets) × 100

All three of these figures provide you with a way to express profit