34:["$","$L35",null,{"category":"$36","relatedArticles":[{"id":"cG9zdDoyNzU1MDY=","databaseId":275506,"postId":275506,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1590,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5MQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19491,"categoryId":19491,"link":"https://smartasset.com/beginner-investing/articles","name":"Investing for Beginners","postCount":{"pageInfo":{"offsetPagination":{"total":587,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"beginner-investing","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$37","date":"2025-01-29T19:48:52","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNzU1MTM=","databaseId":275513,"altText":"An investor researching how ETF discounts work.","date":"2025-01-29T19:43:29","fileSize":215384,"mimeType":"image/jpeg","modified":"2025-01-29T19:44:12","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/01/iStock-1442041159.jpg","__typename":"MediaItem"},"modified":{"datetime":"2025-1-29","readable":"January 29, 2025","readableExtended":"January 29, 2025, 7:48pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDQ=","databaseId":144,"userId":144,"avatar":{"url":"https://secure.gravatar.com/avatar/e1f3d3a0e571088b1ba1f56a767f73d3?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Brandon is a Certified Financial Planner™ (CFP®), Retirement Income Certified Professional (RICP) and Enrolled Agent (EA) with more than 10 years of experience as a financial professional. He runs his own independent financial planning firm called Belonging Wealth Management, where he helps clients plan out their retirement distributions, minimize taxes, build financial plans and more. He also holds a PhD in Finance from Hampton University, and spent years as an Assistant Professor of Finance at both Louisiana College and East Texas Baptist University.\r\n\r\nBrandon's areas of expertise include financial planning, retirement planning, taxes, Social Security, investing, annuities, general personal finance and more. His quotes have appeared in publications like Forbes, U.S. News and World Report, Business Insider and more.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Brandon","fullName":"Brandon Renfro, CFP®, RICP, EA","lastName":"Renfro, CFP®, RICP, EA","name":"Brandon Renfro, CFP®, RICP, EA","postCount":{"pageInfo":{"offsetPagination":{"total":102,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"brenfro","__typename":"User"},"writtenBy":{"id":"dXNlcjo5NA==","databaseId":94,"userId":94,"avatar":{"url":"https://secure.gravatar.com/avatar/72c05cde57f4d7ee65af27e91a5315c2?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Eric","fullName":"Eric Reed","lastName":"Reed","name":"Eric Reed","postCount":{"pageInfo":{"offsetPagination":{"total":946,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"ereed","__typename":"User"},"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/investing/etf-premium-discount","metaDesc":"ETF discounts can help you save some money on trades. Here is how it works and what you need to do to navigate this complicated process.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"How ETF Discounts Work","__typename":"PostTypeSEO"},"slug":"etf-premium-discount","status":"publish","title":"How ETF Discounts Work ","uri":"/investing/etf-premium-discount","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":"$38","description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":"$39","email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":"$3a","slug":"smartasset-team","__typename":"User"},"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$3d","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$3e","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$3f","slug":"arturo-conde-cepf","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDQ=","databaseId":144,"userId":144,"avatar":"$42","description":"Brandon is a Certified Financial Planner™ (CFP®), Retirement Income Certified Professional (RICP) and Enrolled Agent (EA) with more than 10 years of experience as a financial professional. He runs his own independent financial planning firm called Belonging Wealth Management, where he helps clients plan out their retirement distributions, minimize taxes, build financial plans and more. He also holds a PhD in Finance from Hampton University, and spent years as an Assistant Professor of Finance at both Louisiana College and East Texas Baptist University.\r\n\r\nBrandon's areas of expertise include financial planning, retirement planning, taxes, Social Security, investing, annuities, general personal finance and more. His quotes have appeared in publications like Forbes, U.S. News and World Report, Business Insider and more.","additionalMeta":"$43","email":null,"firstName":"Brandon","fullName":"Brandon Renfro, CFP®, RICP, EA","lastName":"Renfro, CFP®, RICP, EA","name":"Brandon Renfro, CFP®, RICP, EA","postCount":"$44","slug":"brandon-renfro-cfp-ricp-ea","__typename":"User"},"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ5MQ==","children":"$47","databaseId":19491,"categoryId":19491,"link":"https://smartasset.com/beginner-investing/articles","name":"Investing for Beginners","postCount":587,"slug":"beginner-investing","ancestors":"$49","parent":"$4c","__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

Exchange traded funds (ETFs) are portfolio-based assets typically organized around a specific investment goal. Investors invest in ETFs by purchasing shares of the portfolio on public exchanges. When the listed share price of an ETF dips significantly below the portfolio’s net asset value (NAV), the fund is at a “discount.” This is generally a good opportunity to buy the fund, since its administrators will typically respond to a discount by reducing the number of shares in circulation to bring the price back up. Here’s what you need to know.

","

If you want to add ETFs and other investments to your portfolio, a financial advisor can help you develop a strategy to maximize returns.

","

What Are ETFs?

","

ETFs are portfolio-based investment products. Each fund holds a collection of assets typically arranged around a specific theme or financial goal. For example, an ETF might invest in the technology sector by holding industry stocks, or it might invest exclusively in high-yield bonds. Investors buy shares of an ETF and can receive yields, dividends and other returns on a basis proportional to their ownership.

","

Shares in an ETF are sold on public exchanges like the New York Stock Exchange (NYSE). They are highly liquid assets that can be bought and sold as freely as shares of stock.

","

The value of an ETF is based on its overall collection of assets. This allows funds to invest in more growth-oriented products like stocks while the fund’s inherent diversity offers a measure of stability. An investor will not collect the outsized gains of a single high-performing stock, for example, since lower-performing assets will weigh the portfolio down. Nor will they suffer the losses of a single crashing stock due to the returns of higher-performing assets.

","

What Is an ETF Discount?

","

","

Due to its nature as a portfolio asset, an ETF operates much like a mutual fund. Both investment vehicles are measured based on net asset value (NAV). This is the total value of assets represented by each share in the fund. It is measured as the combined value of all assets the portfolio owns, less any liabilities, divided by the fund’s number of shares.

","

However, while a mutual fund’s share value is largely determined by its NAV, an ETF’s share value is determined by share price. Since an ETF is a liquid, market-traded product, that share price can fluctuate in real time based largely on supply and demand. Greater demand relative to the existing supply of an ETFs shares will drive the price up. Falling demand relative to the existing supply of an ETFs shares will drive the price down.

","

Due to this liquidity, an ETF’s share price can relatively easily move off of its NAV. If heavy buying drives an ETF’s share price significantly above its NAV, the fund is trading for more than it is worth. This is known as a premium.

","

If heavy selling drives an ETF’s share price significantly below its NAV, the fund is trading for less than it is worth. This is known as a discount.

","

For example, say that ABC Fund has issued 8,000 shares. It holds the following assets:

","

1,000 shares of stock at $10 per share
500 shares of stock at $20 per share
1,500 shares of stock at $15 per share

","

In this case, ABC Fund would have a net asset value of $53.12. (Total assets = $10 *1,000 + $20 * 500 + $15 * 1,500 = $42,500 / 8,000 shares)

","

If ABC Fund currently trades for $53 per share, the fund would be considered fairly priced since its share price is close to its net asset value. However, say that trading drops for ABC Fund, driving its share price down to $45. In this case, ABC Fund is trading at a 16% discount.

","

How Do ETF Discounts Affect Your Trades?

","

When an ETF trades at either a premium or a discount, the administrator will typically attempt to bring the fund’s share price back in line with the NAV. This is done through either creation or redemption.

","

When an ETF trades at a premium, the administrator will create new shares and issue them to market participants. This helps reduce the market price by increasing supply relative to the demand.

","

When an ETF trades at a discount, the administrator will redeem shares by collecting them from market participants. This takes shares out of circulation, helping to raise the market price by reducing supply relative to the demand.

","

For investors, this can create an opportunity. Every publicly traded ETF will publish its NAV, typically calculated daily at the close of the market. Investors who see that an ETF has begun trading at a discount, or who see a fund’s underlying assets moving toward discount rates before the close of trading, can buy into the fund. It is likely that the fund administrators will redeem shares to raise the price, making this a good opportunity to buy.

","

Bottom Line

","

","

When an ETF’s share price is significantly lower than its net asset value, this is known as trading at a “discount.” When this happens the ETF will typically attempt to raise the share price through the redemption process, removing shares from circulation to reduce the supply relative to demand.

","

Investment Planning Tips

","$4e","

Photo credit: ©iStock.com/AzmanL, ©iStock.com/Lordn, ©iStock.com/nensuria

"],"experts":null,"link":"/beginner-investing/etf-premium-discount","modifiedIso":"2025-01-29T19:48:53.000Z","published":{"datetime":"2025-1-29","readable":"January 29, 2025","readableExtended":"January 29, 2025, 7:48pm ET"},"publishedIso":"2025-01-29T19:48:52.000Z","shareInfo":{"title":"How ETF Discounts Work ","origin":"/investing/etf-premium-discount"},"isNewsArticle":true},{"id":"cG9zdDoyNzg2ODA=","databaseId":278680,"postId":278680,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1590,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5Mw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19493,"categoryId":19493,"link":"https://smartasset.com/how-to-invest/articles","name":"How to Invest","postCount":{"pageInfo":{"offsetPagination":{"total":214,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"how-to-invest","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$4f","date":"2025-02-27T18:47:27","excerpt":"

Perpetual bonds have no maturity date, allowing them to pay interest indefinitely, making them appealing for long-term income. They come in different types, such as government and corporate bonds, each with varying risks and interest rates. To understand potential returns, investors should know how to calculate yield, which is found by dividing the annual interest […]

\n","featuredImage":{"id":"cG9zdDoyNzg2ODE=","databaseId":278681,"altText":"An investor researching perpetual bonds for his portfolio.","date":"2025-02-27T18:40:26","fileSize":227411,"mimeType":"image/jpeg","modified":"2025-02-27T18:41:14","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/02/iStock-1095256018.jpg","__typename":"MediaItem"},"modified":{"datetime":"2025-2-27","readable":"February 27, 2025","readableExtended":"February 27, 2025, 6:47pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo3Ng==","databaseId":76,"userId":76,"avatar":{"url":"https://secure.gravatar.com/avatar/ff1d12e3cebfaa1fe2b25aef26174d63?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Becca Stanek is an experienced writer and editor who has worked in the personal finance space since 2017. Her work has appeared in a variety of publications, including SmartAsset, The Week, LendingTree, SoFi, Credible, CNN Underscored, Forbes, Policygenius, Buy Side from WSJ and Atticus, among others. She holds a BA in English from Depauw University and an MFA in Fiction from Queens University of Charlotte.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Becca","fullName":"Becca Stanek","lastName":"Stanek","name":"Becca Stanek","postCount":{"pageInfo":{"offsetPagination":{"total":21,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"bstanek","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDQ=","databaseId":144,"userId":144,"avatar":{"url":"https://secure.gravatar.com/avatar/e1f3d3a0e571088b1ba1f56a767f73d3?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Brandon is a Certified Financial Planner™ (CFP®), Retirement Income Certified Professional (RICP) and Enrolled Agent (EA) with more than 10 years of experience as a financial professional. He runs his own independent financial planning firm called Belonging Wealth Management, where he helps clients plan out their retirement distributions, minimize taxes, build financial plans and more. He also holds a PhD in Finance from Hampton University, and spent years as an Assistant Professor of Finance at both Louisiana College and East Texas Baptist University.\r\n\r\nBrandon's areas of expertise include financial planning, retirement planning, taxes, Social Security, investing, annuities, general personal finance and more. His quotes have appeared in publications like Forbes, U.S. News and World Report, Business Insider and more.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Brandon","fullName":"Brandon Renfro, CFP®, RICP, EA","lastName":"Renfro, CFP®, RICP, EA","name":"Brandon Renfro, CFP®, RICP, EA","postCount":{"pageInfo":{"offsetPagination":{"total":102,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"brenfro","__typename":"User"},"writtenBy":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1590,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"hideAuthor":true,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/investing/perpetual-bond","metaDesc":"Perpetual bonds provide long-term income with no maturity date, offering regular interest payments indefinitely.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"Perpetual Bonds: Definition, Yield Calculation, Examples","__typename":"PostTypeSEO"},"slug":"perpetual-bond","status":"publish","title":"Perpetual Bonds: Definition, Yield Calculation, Examples","uri":"/investing/perpetual-bond","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":null,"editedBy":{"id":"dXNlcjo3Ng==","databaseId":76,"userId":76,"avatar":"$50","description":"Becca Stanek is an experienced writer and editor who has worked in the personal finance space since 2017. Her work has appeared in a variety of publications, including SmartAsset, The Week, LendingTree, SoFi, Credible, CNN Underscored, Forbes, Policygenius, Buy Side from WSJ and Atticus, among others. She holds a BA in English from Depauw University and an MFA in Fiction from Queens University of Charlotte.","additionalMeta":"$51","email":null,"firstName":"Becca","fullName":"Becca Stanek","lastName":"Stanek","name":"Becca Stanek","postCount":"$52","slug":"becca-stanek","__typename":"User"},"reviewedBy":{"id":"dXNlcjoxNDQ=","databaseId":144,"userId":144,"avatar":"$55","description":"Brandon is a Certified Financial Planner™ (CFP®), Retirement Income Certified Professional (RICP) and Enrolled Agent (EA) with more than 10 years of experience as a financial professional. He runs his own independent financial planning firm called Belonging Wealth Management, where he helps clients plan out their retirement distributions, minimize taxes, build financial plans and more. He also holds a PhD in Finance from Hampton University, and spent years as an Assistant Professor of Finance at both Louisiana College and East Texas Baptist University.\r\n\r\nBrandon's areas of expertise include financial planning, retirement planning, taxes, Social Security, investing, annuities, general personal finance and more. His quotes have appeared in publications like Forbes, U.S. News and World Report, Business Insider and more.","additionalMeta":"$56","email":null,"firstName":"Brandon","fullName":"Brandon Renfro, CFP®, RICP, EA","lastName":"Renfro, CFP®, RICP, EA","name":"Brandon Renfro, CFP®, RICP, EA","postCount":"$57","slug":"brandon-renfro-cfp-ricp-ea","__typename":"User"},"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$5a","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$5b","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$5c","slug":"arturo-conde-cepf","__typename":"User"}},"category":{"id":"dGVybToxOTQ5Mw==","children":"$5f","databaseId":19493,"categoryId":19493,"link":"https://smartasset.com/how-to-invest/articles","name":"How to Invest","postCount":214,"slug":"how-to-invest","ancestors":"$61","parent":"$64","__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

","

If you want to buy perpetual bonds, a financial advisor can help you determine how they and other investments will fit into your portfolio.

","

How Perpetual Bonds Work

","

Perpetual bonds, often referred to as “perps,” are unique financial instruments that differ from traditional bonds in one key aspect: They have no maturity date. This means that the issuer is not obligated to repay the principal amount at any specific time. Instead, perpetual bonds provide investors with a steady stream of interest payments indefinitely.

","

These bonds are particularly appealing to investors seeking long-term income, as they offer a fixed interest rate that can provide a reliable source of cash flow over time. The interest rates of perpetual bonds also are typically higher than those of bonds with a fixed maturity, which helps compensate investors for the lack of a maturity date and the associated risks, such as prolonged exposure to an issuer’s credit risk and the possibility that the issuer can call the bond at any time, including before an interest rate adjustment.

","

Investors also should be aware that the value of perpetual bonds can fluctuate with changes in interest rates, and their yield may not necessarily keep pace with inflation.

","

Benefits of a Perpetual Bond

","

Perpetual bonds can offer a number of upsides. Here are four to consider:

","$66","

How to Calculate Yield and Value of a Perpetual Bond

","

","

To determine the value of a perpetual bond, investors will use the formula:

","

Value = Annual Coupon Payment / Required Rate of Return

","

This formula assumes that the bond will continue to pay the same coupon indefinitely. The required rate of return is the investor’s desired yield, which can vary based on market conditions and individual risk tolerance. For example, if an investor requires a 4% return and the bond pays an annual coupon of 40, the bond’s value would be $1,000.

","

Meanwhile, the yield of a perpetual bond is determined using the following formula:

","

Yield = Annual Coupon Payment / Current Market Price of the Bond

","

This calculation provides the current yield, which reflects the return an investor can expect based on the bond’s current price. So, if a perpetual bond has an annual coupon payment of 50 and is currently priced at $1,000, the yield would be 5%.

","

Understanding both the valuation and yield allows investors to compare perpetual bonds with other fixed-income securities and make strategic investment choices.

","

What Is the Duration of a Perpetual Bond?

","

There is technically no maturity date of a perpetual bond, which many investors find attractive when compared to other bonds. The concept of duration in bond investing typically refers to the sensitivity of a bond’s price to changes in interest rates. For perpetual bonds, the duration is theoretically infinite because they do not have a fixed end date.

","

However, in practical terms, the duration of a perpetual bond can be approximated by dividing the bond’s coupon rate by the current market interest rate. This approximation can help investors understand how the bond’s price might fluctuate with interest rate changes, providing a useful measure for managing interest rate risk.

","

Bottom Line

","

","

Perpetual bonds provide long-term income with no maturity date, offering regular interest payments indefinitely. Often issued by financial institutions and corporations, they can be an option for income-seeking investors. To evaluate their potential return, investors should calculate yield by comparing the bond’s coupon rate to its market price. This helps determine whether the bond is a good choice compared to other fixed-income investments.

","

Investment Planning Tips

","$67","

Photo credit: ©iStock.com/Liderina, ©iStock.com/SeventyFour, ©iStock.com/Maca and Naca

"],"experts":null,"link":"/how-to-invest/perpetual-bond","modifiedIso":"2025-02-27T18:47:28.000Z","published":{"datetime":"2025-2-27","readable":"February 27, 2025","readableExtended":"February 27, 2025, 6:47pm ET"},"publishedIso":"2025-02-27T18:47:27.000Z","shareInfo":{"title":"Perpetual Bonds: Definition, Yield Calculation, Examples","origin":"/investing/perpetual-bond"},"isNewsArticle":true},{"id":"cG9zdDoyNzU3MTI=","databaseId":275712,"postId":275712,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1590,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5MQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19491,"categoryId":19491,"link":"https://smartasset.com/beginner-investing/articles","name":"Investing for Beginners","postCount":{"pageInfo":{"offsetPagination":{"total":587,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"beginner-investing","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$68","date":"2025-01-31T10:55:59","excerpt":"

Year-over-year (YOY) growth is a performance indicator often used by investors to measure financial progress and compare results from one period to another. The measurement, which looks at change across two comparable periods of time, can provide valuable information about trends, risks and opportunities. Investors can then use this information to evaluate the performance and […]

\n","featuredImage":{"id":"cG9zdDoyNzU3MjA=","databaseId":275720,"altText":"An investor calculating year-over-year growth.","date":"2025-01-31T10:51:16","fileSize":237506,"mimeType":"image/jpeg","modified":"2025-01-31T10:52:04","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2025/01/iStock-1444291491.jpg","__typename":"MediaItem"},"modified":{"datetime":"2025-1-31","readable":"January 31, 2025","readableExtended":"January 31, 2025, 10:57am ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjo3Ng==","databaseId":76,"userId":76,"avatar":{"url":"https://secure.gravatar.com/avatar/ff1d12e3cebfaa1fe2b25aef26174d63?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Becca Stanek is an experienced writer and editor who has worked in the personal finance space since 2017. Her work has appeared in a variety of publications, including SmartAsset, The Week, LendingTree, SoFi, Credible, CNN Underscored, Forbes, Policygenius, Buy Side from WSJ and Atticus, among others. She holds a BA in English from Depauw University and an MFA in Fiction from Queens University of Charlotte.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Becca","fullName":"Becca Stanek","lastName":"Stanek","name":"Becca Stanek","postCount":{"pageInfo":{"offsetPagination":{"total":21,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"bstanek","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1590,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"hideAuthor":true,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/investing/how-to-calculate-yoy-growth","metaDesc":"Year-over-year (YOY) growth is used by investors to measure financial progress and compare results from one period to another.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"How Investors Can Calculate Year-Over-Year (YOY) Growth","__typename":"PostTypeSEO"},"slug":"how-to-calculate-yoy-growth","status":"publish","title":"How Investors Can Calculate Year-Over-Year (YOY) Growth","uri":"/investing/how-to-calculate-yoy-growth","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":null,"editedBy":{"id":"dXNlcjo3Ng==","databaseId":76,"userId":76,"avatar":"$69","description":"Becca Stanek is an experienced writer and editor who has worked in the personal finance space since 2017. Her work has appeared in a variety of publications, including SmartAsset, The Week, LendingTree, SoFi, Credible, CNN Underscored, Forbes, Policygenius, Buy Side from WSJ and Atticus, among others. She holds a BA in English from Depauw University and an MFA in Fiction from Queens University of Charlotte.","additionalMeta":"$6a","email":null,"firstName":"Becca","fullName":"Becca Stanek","lastName":"Stanek","name":"Becca Stanek","postCount":"$6b","slug":"becca-stanek","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$6e","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$6f","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$70","slug":"arturo-conde-cepf","__typename":"User"}},"category":{"id":"dGVybToxOTQ5MQ==","children":"$73","databaseId":19491,"categoryId":19491,"link":"https://smartasset.com/beginner-investing/articles","name":"Investing for Beginners","postCount":587,"slug":"beginner-investing","ancestors":"$75","parent":"$78","__typename":"Category"},"isModifiedBeforePublished":false,"contentBlocks":["

","

Need help evaluating stocks for your portfolio? Consider working with a financial advisor.

","

What Is YOY Growth?

","

YOY growth is the percentage change in a certain metric—like revenues, earnings or customers—from one year to the next. It helps you evaluate how a stock’s main metrics are growing over time and identify any trends or patterns. For example, if a company’s sales increased by 10% in 2025 when compared with 2024, that would mean 10% YOY growth.

","

YOY is often used to compare growth from a quarter of one year to the same quarter in the previous year. This helps smooth out any effects due to seasonality and gives a more accurate picture of a company’s performance.

","

As an example, the fourth quarter is the most important quarter for retail companies because of the holiday season. As such, comparing a company’s performance in the fourth quarter of 2025 with the fourth quarter of 2024 would give a better idea of a company’s performance than if you were to compare it with the third quarter of 2025.

","

On the other hand, a company could try to show impressive quarterly performance but may fail to show that it’s improving over a longer period of time when calculated year-over-year. Or, a company could claim its overall performance is growing, when in reality individual quarters display different trends.

","

Calculating YOY growth, thus, offers a better understanding of a company’s true business performance because it adjusts for any effects of seasonality.

","

How to Calculate YOY Growth

","

","

To calculate YOY growth, you can use this simple formula:

","

YOY Growth (%) = (Current Year Value – Previous Year Value) / Previous Year Value x 100

","

For example, if a company’s revenue was $1,000,000 in 2024 and $1,200,000 in 2025, the YOY growth would be 20%. The math would look like is:

","

YOY Growth (%) = ($1,200,000 – $1,000,000) / $1,000,000 x 100 = 20%

","

The YOY growth can be positive or negative, depending on whether the current year value is higher or lower than the previous year value. A positive YOY growth shows an increase, while a negative YOY growth shows a decrease.

","

You can also calculate YOY growth for each quarter by comparing the same quarter in different years. For example, if a company’s revenue was $250,000 in the first quarter of 2024 and $300,000 in the first quarter of 2025, the YOY growth for Q1 would be 20%. To make this calculation, you would simply substitute quarterly numbers for the annual numbers used in the formula above.

","

The Importance of YOY Growth for Investors

","

YOY growth is important for investors to consider because it provides insight into a company’s financial performance, trends and growth trajectory over time.

","

Here are three key benefits of using year-over-year metrics when making investment decisions:

","$7a","

Another advantage of YOY growth calculations is their simplicity. The calculation is easy to understand and compute, even for novice investors or small business owners who are creating balance sheets for the first time. By focusing only on the two most recent periods, YOY growth also filters out any day-to-day fluctuations in financial performance.

","

Bottom Line

","

","

YOY growth could help investors compare a company’s performance against competitors and over time. It can also show a company’s progress and momentum, but should not be used alone. Combining it with other financial metrics will give you a clearer picture of a company’s value and future potential.

","

Investment Planning Tips

","$7b","

"],"experts":null,"link":"/beginner-investing/how-to-calculate-yoy-growth","modifiedIso":"2025-01-31T10:57:04.000Z","published":{"datetime":"2025-1-31","readable":"January 31, 2025","readableExtended":"January 31, 2025, 10:55am ET"},"publishedIso":"2025-01-31T10:55:59.000Z","shareInfo":{"title":"How Investors Can Calculate Year-Over-Year (YOY) Growth","origin":"/investing/how-to-calculate-yoy-growth"},"isNewsArticle":true},{"id":"cG9zdDoyNzEwOTc=","databaseId":271097,"postId":271097,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1590,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ5Mg==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19492,"categoryId":19492,"link":"https://smartasset.com/market-analysis-and-economic-trends/articles","name":"Market Analysis & Economic Trends","postCount":{"pageInfo":{"offsetPagination":{"total":118,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"market-analysis-and-economic-trends","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$7c","date":"2024-12-11T19:22:54","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNzExMDA=","databaseId":271100,"altText":"An investor researching how profitability ratios are calculated.","date":"2024-12-11T19:16:13","fileSize":187978,"mimeType":"image/jpeg","modified":"2024-12-11T19:21:23","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/12/iStock-1879074629.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-11","readable":"December 11, 2024","readableExtended":"December 11, 2024, 7:22pm ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":{"expertise":"Financial Planning, Retirement Planning, Investment Planning, Tax Planning","__typename":"User_Additionalmeta"},"email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":{"pageInfo":{"offsetPagination":{"total":38,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"aconde","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1590,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"factCheckedBy":null,"secondEditor":null,"hideAuthor":true,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/investing/how-to-calculate-profitability-ratio","metaDesc":"Businesses often use profitability ratios to gauge their performance against industry benchmarks or competitors.","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":5,"title":"What Profitability Ratio Is and How to Calculate It","__typename":"PostTypeSEO"},"slug":"how-to-calculate-profitability-ratio","status":"publish","title":"What Profitability Ratio Is and How to Calculate It","uri":"/investing/how-to-calculate-profitability-ratio","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":null,"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":"$7d","description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. As a certified educator in personal finance, he edits and writes content that focuses on retirement, investments, home buying and other financial topics.\r\n\r\nArturo is a bilingual native in English and Spanish, and also writes as a freelance journalist for NBC News, among other publications. His articles have been published in Fusion, Univision, City Limits, the NACLA Report on the Americas and WhoWhatWhy, as well as La Opinión A Coruña newspaper in Spain.","additionalMeta":"$7e","email":null,"firstName":"Arturo","fullName":"Arturo Conde, CEPF®","lastName":"Conde, CEPF®","name":"Arturo Conde, CEPF®","postCount":"$7f","slug":"arturo-conde-cepf","__typename":"User"},"reviewedBy":null,"factCheckedBy":null,"secondEditor":null},"category":{"id":"dGVybToxOTQ5Mg==","children":"$82","databaseId":19492,"categoryId":19492,"link":"https://smartasset.com/market-analysis-and-economic-trends/articles","name":"Market Analysis & Economic Trends","postCount":118,"slug":"market-analysis-and-economic-trends","ancestors":"$84","parent":"$87","__typename":"Category"},"isModifiedBeforePublished":true,"contentBlocks":["

Businesses often use profitability ratios to gauge their performance against industry benchmarks or competitors. Calculating these ratios involves a straightforward process, typically using figures from a company’s financial statements, such as the income statement and balance sheet. Whether you’re a seasoned investor or a business owner looking to optimize your operations, understanding how to calculate and interpret profitability ratios can help you make informed financial decisions. A financial advisor can provide additional insights into how these metrics are used for picking companies that align with your long-term goals.

","

When the Profitability Ratio Is Used

","

Investors use profitability ratios to determine whether a company offers a viable investment strategy by comparing its profitability with competitors.

","

Business owners and managers can also use them for cost management and operational efficiency. Additionally, lenders may evaluate profitability ratios to assess a company’s ability to repay loans.

","

One of the most valuable aspects of profitability ratios is their ability to reveal trends over time. Analyzing these ratios over multiple periods can help stakeholders identify patterns and assess whether a company’s profit margins are improving or declining.

","

This trend analysis can help investors and managers understand the impact of strategic decisions, market conditions and operational changes on a company’s financial performance.

","

But, while profitability ratios are powerful tools, they do have limitations.

","

First, these ratios are often influenced by accounting policies and practices, which can vary between companies and industries.

","

Additionally, profitability ratios do not account for external factors such as economic conditions or industry-specific challenges that may impact a company’s performance.

","

Types of Profitability Ratios

","

","

Here are five types of profitability ratios that investors commonly use:

","$89","

How to Calculate the Profitability Ratio

","

Several key profitability ratios are commonly used to assess a company’s performance. The most widely used include the gross profit margin, operating profit margin and net profit margin.

","

To calculate the gross profit margin, subtract the cost of goods sold (COGS) from total revenue, then divide the result by total revenue. Multiply by 100 to express the result as a percentage.

","

The operating profit margin is calculated by subtracting operating expenses from gross profit, and then dividing by total revenue. Like the gross profit margin, the result is multiplied by 100 to convert it into a percentage.

","

To find the net profit margin, subtract all expenses, including taxes and interest, from total revenue, then divide by total revenue. Again, multiply by 100 to express the result as a percentage.

","

You should use profitability ratios in conjunction with other financial metrics and qualitative factors to gain a complete picture of a company’s financial health. Comparing these ratios against industry benchmarks and historical performance can provide additional context.

","

Bottom Line

","

","

Profitability ratios can offer investors, business owners and financial analysts a clear picture of how effectively a company is generating profit when compared with its revenue, assets, or equity. Stakeholders can calculate them regularly to identify areas for improvement and benchmark against industry standards.

","

Investment Planning Tips

","$8a","

"],"experts":null,"link":"/market-analysis-and-economic-trends/how-to-calculate-profitability-ratio","modifiedIso":"2024-12-11T19:22:54.000Z","published":{"datetime":"2024-12-11","readable":"December 11, 2024","readableExtended":"December 11, 2024, 7:22pm ET"},"publishedIso":"2024-12-11T19:22:54.000Z","shareInfo":{"title":"What Profitability Ratio Is and How to Calculate It","origin":"/investing/how-to-calculate-profitability-ratio"},"isNewsArticle":true}]}]