What type of ratios illustrate the relative profitability or performance of a business?

Profitability ratios are specifically designed to assess a company's ability to generate profit relative to its revenue, assets, or equity. They provide insights into how well a business is performing in terms of its income generation capabilities. Common examples include the gross profit margin, net profit margin, and return on equity.

These ratios are crucial for stakeholders such as investors and management as they indicate the financial health of the business and its ability to convert sales into actual profit. By focusing on profitability ratios, businesses can evaluate their operational efficiency and make informed decisions to improve profitability, manage costs, and enhance their overall financial performance.

Liquidity ratios, on the other hand, measure a company's ability to meet short-term obligations. Efficiency ratios assess how well a company uses its assets to generate revenues. Solvency ratios evaluate a company's long-term stability and ability to sustain operations over time. While all these ratios are important for understanding different aspects of a business's financial health, only profitability ratios directly address the effectiveness of a company's profit-making ability.