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

Acceptance rule of irr, Acceptance Rule of IRR IRR will accept a ventu...

Acceptance Rule of IRR IRR will accept a venture if its IRR is higher than or equivalent to the minimum required rate of return such is usually the cost of finance also recogn

Characteristics of an efficient tax system, Question 1 a) What are the...

Question 1 a) What are the main characteristics of an Efficient Tax system? b) What are the instruments of Public Finance and explain their efficiency. c) Explain what

Dividend policy, Charleston Industrial revised its dividend policy and deci...

Charleston Industrial revised its dividend policy and decided that it wants to maintain a retained earnings account of $1 million. The company''s retained earnings account at the e

Finance, If you inherited $ 45,000 today and invested all of it in a securi...

If you inherited $ 45,000 today and invested all of it in a security that paid a 7 percent rate of return, how much would you have in 25 years?

Should the short-run effects on eps influence the ch, A firm has a $100 mil...

A firm has a $100 million capital budget. It is considering two project, each costing $100 million. Project A has an IRR of 20%; has an NPV of $9 million; and will be terminated af

Costs of capital, a bond that has a 1000 per value and a contract or coupon...

a bond that has a 1000 per value and a contract or coupon interest rate of 12.8%. The bond is selling for a price of $1125 and will mature in 10 years. The firm''s tax rate is 34%

P/E ratio, How are earnings calculated for the Pe ratio?

How are earnings calculated for the Pe ratio?

Prepare financial analysis of a company, Using the data provided in Appendi...

Using the data provided in Appendix 1 prepare an analysis for the attention of the directors of Meridian Ltd. The analysis should highlight the strategic differences between the co

Risk-free interest rate-corporate tax rate, XYZ is considering a capital re...

XYZ is considering a capital restructuring to allow $300 million in debt. Currently, XYZ is an all-equity firm with earnings before interest and taxes of $260 million. Assume unlev

Analysis, Inventories turnover 8 times 4 times Re...

Inventories turnover 8 times 4 times Receivable days 63 days 40 days

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