In this video, we will look at some of the common profitability ratios like

return on equity, return on assets, gross profit margin,

operating profit margin, net profit margin, etc.

We will continue to use Amazon's financial statements to compute these financial

ratios.

The first couple of profitability ratios measure how well a company has used its

balance sheet resources to generate profits.

These two ratios, our return on equity, ROE, and return on assets, ROA.

ROE is defined as the net income divided by the average shareholder's equity.

The denominator is the average over two consecutive years.

For 2015, we will average shareholders' equity from 2014 and 2015 balance sheets.

The reason we average over two consecutive years is

that this number will change at least a few times in a year.

So we don't know the exact level of shareholders' equity on

each day during the year as profits are generated.

In most cases when we have one balanced sheet item and

one income statement item as a part of a ratio,

we will use this method of averaging for the balance sheet item.

To calculate Amazon's ROE for 2015,

we know that it's net income for 2015 was $0.60 billion.

It's average shareholder's equity for 2015 was $12.06 billion.

Dividing 0.60 billion by 12.6 billion,

we get an ROE of 0.0494 or

multiplying it by 100, we get 4.94%.

For every dollar of shareholder's equity,

Amazon earned a little less than $0.5 in profits.

Similar calculations yield ROEs of negative 2.35%,

positive 3.05% and negative 0.49%

respectively for 2014, 13, and 12.

This shows that Amazon's profitability has not been very stable over

the last few years and that it has been at its most profitable in 2015.

The next profitability ratio is ROA, it is defined as

the company's net income divided by its average total assets.

Average total assets are defined much like average shareholders equity for ROA.

In 2015, Amazon's net income was $0.60 billion,

and its average total assets was $59.97 billion.

Dividing the net income by it's average total assets,

Amazon's ROA for 2015 comes out to be 0.99%.

For every $1 in total assets owned by Amazon 2015,

it generated profits of less than 1 cent.