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Profitability is the usual measure of financial performance. It is related to the ability to pay dividends, service loans, and invest in new assets. This entry presents key indicators of profitability. The first two measures are concerned with components of income. Gross profit or gross margin is measured as sales less the cost of goods sold. The gross profit on sales compares gross profit to sales. This ratio provides an indication of income before subtracting selling and administrative costs, interest, income taxes, and other items. As such, it provides a useful starting point in the analysis of profitability. The profit margin measures income as a percentage of sales. Analysts often estimate future profit margins and incorporate these estimates in the prediction of future income. For example, an analyst may read that future sales are expected to be $10,000,000 per year. If the profit margin is estimated at 9 percent, this implies future profits of $900,000. Return on equity is a widely used measure of return on invested capital. The return on equity is measured as net income divided by owners' equity. One deficiency of the usual return on equity measure is the use of book (accounting) carrying values. Since shares usually trade at a premium to book value, this measure does not reflect the shareholder's opportunity cost. Consequently, some analysts substitute the market value ... log in or subscribe to read full text