The income statement and balance sheet are two important reports that show the profit and net worth of the company. Profitability ratio analyses shows how the well the company is doing in terms of profits compared to sales. They also show how well the assets are performing in terms of generating revenue.

Profitability – The Income Statement and Balance Sheet

The income statement shows the net profit of the company by subtracting expenses from gross profit (sales – cost of good sold). The balance sheet lists the value of the assets, as well as liabilities. In simple terms, the main function of the balance sheet is to show the company’s net worth by subtracting liabilities from assets. Even though the balance sheet does not report profits, there’s an important relationship between assets and profit.

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