Interpretations of profitability ratio''s, Financial Management

Interpretations of Profitability Ratio's -

ROA:       ROA or the Return on Assets ratio is the ratio of net profit to total assets and this ratio indicates whether total assets of the business have been properly used or not and thus proves the efficiency of the management in utilizing the assets. It is also a means of measuring profitability and management efficiency of the business.

 

NPM:       Net Profit Margin is the ratio of net profit to sales and this ratio indicate how many amounts of sales are left for proprietor's fund. This ratio acts as a yardstick in measuring both profitability and management efficiency in business operation. Higher the ratio greater is the profitability and better is the return to the proprietor's fund.

 

GPM:       Gross Profit Margin is the ratio of Gross profit to sales. Higher the ratio greater is the earning capacity and better is the management efficiency. Good management always looks for high rate of Gross margin in order to ensure the adequate coverage for operating expenses and sufficient returns to the proprietor's fund. This ratio acts as an effective check over the movement of stock and is very useful for the test of both profitability and management efficiency.

 

ROE:        Return on Equity or Return on Net Worth is the ratio of net profit to Proprietor's fund. This ratio indicates how profitably proprietor's funds being used and is considered a very effective measure to test the overall profitability of the business. Higher the ratio greater the financial strength and better is the return.

 

ROCE:     Return on Capital Employed is the ratio of net profit and interest to capital employed and it indicates how efficiently capital employed has been used in the business. Higher the ratio, better the management efficiency and greater is the profitability of the business. Low ratio is the sign of over capitalization and poor management efficiency in the use of capital employed.

 

DPR:        This ratio expresses the relationship between available net profits after tax and equity dividend. It shows the number of times equity dividend is covered by the available profit. Higher the coverage, greater is the financial strength and fair is the return to the shareholders.

Posted Date: 7/26/2012 3:57:37 AM | Location : United States







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