# Profitability Ratios and QuickBooks 2012

*Profitability ratios* analyze a firm’s profitability, and you can use them in QuickBooks 2012. In a sense, these profitability ratios are the most important ratios that you can calculate. They typically provide terribly useful insights into how profitable a firm is and why.

For example, one particularly important profitability ratio is the gross margin percentage, which expresses gross margin as a percent of sales. You can calculate a firm’s break-even point by simply dividing the firm’s fixed costs by its gross margin percentage.

A couple of other profitability ratios you need to understand are the *net operating margin percentage *and *profit margin percentage.*

## Operating income/sales

In a case where operating income equals $60,000 and sales equal $150,000, you calculate the *net operating margin percentage* by using this formula:

$60,000/$150,000

This formula returns the value 0.4. A 0.4 operating margin percentage, which is equivalent to 40 percent, indicates that a firm’s operating income equals 40 percent of its sales.

No guideline exists for what a net operating margin percentage should be. Your main consideration, which you will probably find yourself repeating in your sleep after hearing me say it so much, is that *you want to be competitive. *You want your operating margin percentage to be close to or better than those of your competitors’ net operating margin percentages. That parity (or superiority) enables you to stay competitive.

## Profit margin percentage

The *profit margin percentage* works like the net operating margin percentage; it expresses the firm’s net income as a percentage of sales, as shown in the following formula:

net income/sales

In the case of a business in which the net income equals $50,000 and sales equal $150,000, the firm’s profit margin percentage, therefore, can be calculated with the following formula:

$50,000/$150,000

This formula returns a financial ratio of 0.33. This indicates that the firm’s net income equals roughly 33 percent of its sales.