1. Profitability Ratios: These ratios help a procurement professional understand if the supplier can generate sustainable revenue and control costs. If any of the Profitability Ratios are considerably higher than other suppliers, the supplier in question either has great margins or is controlling cost tighter than peer suppliers.

• Gross Profit Margin: Gross Profit / Sales

If the ratio percentage is greater than zero, the supplier can make a product/service profitably.

• Operating Profit Margin: Operating Profit / Sales

This ratio provides information on a supplier’s business from an operational perspective.  Negative Operating Profit Margin indicates that costs for the supplier are rising faster than the amount of revenue they can generate. If this trend continues, the supplier won’t be able to keep the business afloat for long.

• Net Profit Margin: Net Profit / Sales

This ratio helps gauge supplier’s capability to invest in new product development, research and Development, increase operating capacity, etc.

• Return on Assets: Net Profit / Total Asset

How efficiently a supplier uses its assets to generate earnings.

• Return on Equity: Net Profit / Shareholders equity

This ratio calculates percent profit your supplier makes for every dollar of invested shareholder equity.