Profitability ratio, Finance Basics

Profitability Ratio

These ratios signify the performance of the firm in relation to its capability to derive returns or profit from investment or from sale of goods that is profit margin or sales.

Profitability in relation to sales

  1. The ratio indicates the ability of the firm to control its cost of sales, operating and financing expenses.
  2. They include:

a) Gross profit margin = (Gross profit/Sales) x 100

The ratio signify the ability of the firm to control cost of sales expenses as like gross profit margin of 40% means like 60% of sales revenue was taken up via cost of sales whereas 40% was the gross profit.

b) Operating profit margin = (Operating profit/Earnings before interest & tax)/Sales

The ratio signify capability of the firm to control its operating expenses that like distribution cost, wages and salaries, travelling, telephone and electricity charges etc. as a ratio of 20% means like:

i) 80% of sales relate to both cost and operating of sales expenses

ii) 20% of sales remained as operating margin profit

c) Net profit margin = (Net profit x 100 (earning after tax) + interest)/Sales

This ratio signify the capability of the firm to control financing expenses in particular interest charges e.g. Net profit margin of 10% signify that:

i) 90% of sales were taken up via cost of sales, financing and operating expenses

ii) 10% remained as net profits.

Posted Date: 1/30/2013 2:06:36 AM | Location : United States







Related Discussions:- Profitability ratio, Assignment Help, Ask Question on Profitability ratio, Get Answer, Expert's Help, Profitability ratio Discussions

Write discussion on Profitability ratio
Your posts are moderated
Related Questions
You buy a SML Bond for $980.  The bond has a face value of $1000 and an yearly  coupon rate of 8%.  There are five years left until maturity. a. What is the yield to maturity on


The Audiology Department at Randall Clinic offers many services to the clinic’s patients. The three most common , along with cost and utilization data, are as follows: Service Var


Earnings Yield Valuation EY is given via the earnings made with the business expressed like a percentage of the market price of the business that is The Formula For Earning

Advantages of Development Financial Institutions Advantages or Functions or can say Case for Development Financial Institutions 1. They grant venture capital 2. They gra


Reasons for Different Interest Rate Interest rates may differ in different market and market segment since: i) Size of the loan: Deposits above specific amounts into the

Accounting Exercise AVM 386 Fall 2014 Misty Mark, an infamous archer, decided to open an archery business called Bows and Biceps. The following is a list of transactions for Bows

There are four different commonly used financial hedging techniques and some operational hedging techniques that firms use to manage currency risk. Drawing on literature, critical