From grimoire
Computes and interprets gross margin, operating margin, net margin, ROE, ROA, and ROIC to assess business quality and capital efficiency.
How this skill is triggered — by the user, by Claude, or both
Slash command
/grimoire:calculate-profitability-ratiosThe summary Claude sees in its skill listing — used to decide when to auto-load this skill
Compute and interpret the core profitability ratios — gross margin, operating margin, net margin, ROE, ROA, and ROIC — to assess business quality and capital efficiency.
Compute and interpret the core profitability ratios — gross margin, operating margin, net margin, ROE, ROA, and ROIC — to assess business quality and capital efficiency.
Adopted by: Profitability ratio analysis is foundational in every CFA curriculum, MBA finance course, and investment banking training program. Warren Buffett famously screens for high ROE + low debt as his primary business quality filter. McKinsey's valuation framework centers ROIC (return on invested capital) as the single best predictor of long-term value creation. Impact: McKinsey research shows companies with ROIC > WACC create value; those below destroy it, regardless of revenue growth. Consistent analysis of profitability ratios over time reveals business model trajectory — whether competitive advantage is strengthening or eroding — which neither revenue nor absolute profit shows alone. Why best: Revenue growth is vanity; profitability is sanity; cash is reality. Margin ratios strip growth to reveal the underlying economics: a business growing at 30% but with declining gross margins is likely spending its way to growth. ROIC reveals whether reinvested capital generates returns above the cost of that capital — the definitive test of whether a business creates or destroys value.
Gross Profit Margin — (Revenue − COGS) ÷ Revenue
Measures how efficiently core products/services are produced.
Benchmarks: SaaS 70–85%; retail 25–40%; manufacturing 20–35%; restaurants 60–70%.
Trend matters: declining gross margin signals pricing pressure, input cost inflation, or mix shift to lower-margin products.
Operating Profit Margin (EBIT Margin) — EBIT ÷ Revenue
EBIT = Gross Profit − Operating Expenses (R&D, S&M, G&A).
Measures operational efficiency including overhead. Excludes financing (interest) and tax decisions.
Benchmarks: mature SaaS 20–30%; consumer goods 10–15%; retail 3–8%; software company at scale 25–40%.
Net Profit Margin — Net Income ÷ Revenue
Includes interest, tax, and one-time items. Most susceptible to accounting choices. Use EBIT margin for operating comparison; net margin for shareholder return analysis.
Return on Equity (ROE) — Net Income ÷ Average Shareholders' Equity
Measures return on book value of equity. Buffett threshold: consistently > 15% without excessive leverage.
DuPont decomposition: ROE = Net Margin × Asset Turnover × Equity Multiplier (Leverage). High ROE from leverage is less valuable than high ROE from margins or turnover.
Return on Assets (ROA) — Net Income ÷ Average Total Assets
Asset-efficiency measure. Useful for capital-intensive industries (manufacturing, banking). Benchmarks: banks 1–2%; tech 10–20%; manufacturing 5–10%.
Return on Invested Capital (ROIC) — NOPAT ÷ Invested Capital
NOPAT = EBIT × (1 − tax rate). Invested Capital = Total Equity + Total Debt − Cash.
The superior metric: measures return on all capital deployed, regardless of financing structure.
ROIC > WACC = value creation. ROIC < WACC = value destruction even if profitable.
High-quality benchmarks: Visa 35%+ ROIC; Apple 55%+ ROIC; commodity manufacturers 6–10% ROIC.
Trend analysis (minimum 3 years) — Calculate each ratio for 3–5 years. Ask: Are margins expanding (positive leverage) or compressing (cost pressure, competition)? Is ROIC converging toward or away from WACC? Compare to 3 closest peers.
Identify ratio interactions — High gross margin + low operating margin = cost problem in G&A or R&D. High net margin + low ROIC = capital-inefficient business. High ROIC + low ROE = under-leveraged, could use debt to enhance equity returns.
Analysis of two competing software companies: Company A: 72% gross margin, 18% operating margin, ROIC 28%. Company B: 65% gross margin, 12% operating margin, ROIC 14%. WACC for both: 10%. Verdict: Company A creates substantial value (ROIC 28% > WACC 10%); Company B creates marginal value. Company A's superior gross margin indicates stronger product differentiation or pricing power. Worth a premium multiple.
Finance disclaimer: This skill encodes professional best practices for educational purposes. It is not financial advice. Consult a licensed financial advisor before making investment decisions.
npx claudepluginhub jeffreytse/grimoire --plugin grimoireEvaluates US stocks with fundamental analysis, financial health checks, valuation metrics, key ratios, peer comparisons, quality scoring, and risk assessment.
Normalizes financial statements with R&D capitalization, operating lease conversion, stock-based compensation, and one-time items. Computes FCFF, FCFE, ROIC, and adjusted ratios for valuation.
Quick reference for SaaS finance metrics: formulas, benchmarks, and decision rules. Use for fast lookups during product reviews or investor calls.