Profitability Ratios:
The gross margin is a company’s total revenue less the cost of goods sold, divided by the total revenue. This percentage indicates how much of the revenue a company retains after accounting for direct costs. Typically, a company is thought to be more efficient the more they retain on each sales dollar, which can then be applied to other costs or financial obligations. The industry average for the third and fourth quarters of fiscal year 2014 were 17.97 percent and 17.14 percent, respectively. The gross margin for both companies exceed the industry average. In fiscal year 2013, the difference between the gross margins of both companies was 1 percent; however Smith & Wesson outperforms Sturm Ruger in fiscal year 2014 by 10 percent. This higher percentage indicates that Smith & Wesson is more efficient during their production process.

Return on assets (ROA) is a profitability ratio, which measures how well a company uses its assets to generate a profit. This ratio does not take into consideration a company’s ability to generate a profit using leverage. ROA is calculated by dividing net income by total assets. The industry average for the third and fourth quarters of fiscal year 2014 were 7.18 percent and 6.94 percent. Though both companies’ ratios surpass the industry average, Sturm Ruger ended fiscal year 2014 with an ROA of 40 percent. This ROA, which exceeds Smith & Wesson’s 24 percent for fiscal year 2014, indicates that Sturm Ruger is better at managing their assets more efficiently to generate a profit.

Return on equity (ROE) is net income divided by shareholder equity. This ratio indicates how much profit was generated using the shareholders’ investment in the company. The industry average was 27.50 percent in fiscal year 2013 and 25.35 in fiscal year 2014. In 2013, Smith & Wesson’s ROE was 54 percent, which was