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Chapter 7. Ratio Analysis > Analyzing Profitability Ratios

Analyzing Profitability Ratios

If you are considering investing money in a company, its profitability is a major concern. If the company intends to pay dividends to its stockholders, those dividends must come out of its profits. If the company hopes to increase its worth in the marketplace by enhancing or expanding its product line, then an important source of capital to make improvements is its profit margin. There are several different, but related, means of evaluating a company's profitability.

Finding and Evaluating Earnings Per Share

Depending on your financial objectives, you might consider investing in a company to obtain a steady return on your investment in the form of regular dividend payments, or to obtain a profit by owning the stock as the market value of its shares increases. These two objectives might both be met, but in practice they often are not. Companies frequently face a choice between distributing income in the form of dividends, or retaining that income to invest in research, new products, and expanded operations. The hope, of course, is that the retention of income to invest in the company will subsequently increase its income, thus making the company more profitable and increasing the market value of its stock.


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