Profitability ratio, Finance Basics

Assignment Help:

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.


Related Discussions:- Profitability ratio

Floatation of new shares, Floatation of New Shares Rules for floatati...

Floatation of New Shares Rules for floatation of new shares The company must contain an issued share capital of at least Kshs.20 M. The company must contain c

What financial report exactly do, What financial report exactly do? Fin...

What financial report exactly do? Financial reports tell its intended readers about all the financial information of the company for the period it is reporting. It also contain

Example of capital structure of a company, Example of Capital Structure of ...

Example of Capital Structure of a Company Example Company XYZ restricted has the given capital structure as:   10,000 Sh.10 ordinary shares 10,000

Cum. and ex. - terms used in capital market authority, Cum. And Ex. - Terms...

Cum. And Ex. - Terms Used in Capital Market Authority           These prefixes are written in front of other words as like capital, rights and dividends to qualify them."Cum" i

Accounting, The Morris Corporation has $ 600,000 of debt outstanding, and i...

The Morris Corporation has $ 600,000 of debt outstanding, and it pays an interest rate of 8% annually. Morris’s annual sales are $# million, its average tax rate is 40% and its net

Profit analysis, The Audiology Department at Randall Clinic offers many ser...

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

Cost of finance - capital structure, Cost of Finance - Capital Structure ...

Cost of Finance - Capital Structure This is the price the company pays to retail and acquire finance. To get finance a company will pay implicit costs that are commonly recogn

Calculate operating leverage of tax rate, A firm has sales of Rs. 10,00,000...

A firm has sales of Rs. 10,00,000. Variable cost is 70%, total cost is Rs.9,00,000 and Debt of Rs. 5,00,000 at 10% rate of interest. If tax rate is 40% calculate:

Prepare comparative income statement, From the following cost, production a...

From the following cost, production and sales data of Decors Motor Ltd., prepare comparative income statement for three years under (i) absorption costing method, and (ii) marginal

Explain about commercial banks in depository institutions, Explain about co...

Explain about commercial banks in depository institutions. Commercial banks: Commercial banks accept deposits or liabilities to create loans or assets and to buy governme

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd