Profitability Ratio A profitability ratio is a measure of financial ratio defining the profit percent and return percent from the business using data from financial statements at a specific point of time It assess business’s ability to generate gross profit, operating profit and net profit from the sales using data from profit& loss statement It even takes into consideration various return generating ability of business in terms of return on assets, return on capital employed, return on equity, return on investment using data from balance sheet Types of profitability ratio Gross Profit Ratio, Net Profit Ratio, Operating Profit Ratio, Return on Assets, Return on Equity, Return on Investment, Return on Capital Employed Gross Profit Ratio Gross Profit Ratio(GPR) is a profitability ratio that shows the relationship between gross profit and the revenue from net sales GPR = (퐆퐫퐨퐬퐬 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬) Net Profit Ratio The net profit ratio is equal to how much net profit is generated as a ratio of revenue earned through sales Net Profit Ratio = (퐍퐞퐭 푷풓풐풇풊풕)/(퐍퐞퐭 푺풂풍풆풔) Operating Profit Margin is a profitability ratio used to calculate the percentage of operating profit a company produces from its operations, prior to deduction of taxes and interest charges Operating Profit Ratio Operating Profit Ratio = (퐎퐩퐞퐫퐚퐭퐢퐧퐠 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬) Return on assets (ROA) is a kind of profitability measure used to determine returns on assets relevant when compared across the companies or previous performance of the company Return On Asset = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐀퐬퐬퐞퐭퐬) Return on equity (ROE) is a measure of financial performance calculated by dividing net profit by average shareholders' equity ROE = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐄퐪퐮퐢퐭퐲) Return on capital employed is a profitability ratio used in valuation of company’s financial position depicting the return out of capital employed ROCE = 퐄퐁퐈퐓/(퐂퐚퐩퐢퐭퐚퐥 퐄퐦퐩퐥퐨퐲퐞퐝) Return on investment is a profitability measure used by businesses to identify the efficiency of business in generating return out of an investment ROI = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐂퐨퐬퐭 퐨퐟 퐈퐧퐯퐞퐬퐭퐦퐞퐧퐭) Ratio analysis refers to the analysis and interpretation of the data collected from the financial statements (i.e., Profit and Loss Statement, Balance Sheet and Fund/Cash Flow statement etc.) Thank You for Watching DevTech Finance

1. PROFITABILITY
RATIO
RATIO ANALYSIS IN FINANCIAL
STATEMENTS

2. AGENDA
• Introduction to Ratio Analysis Net Profit Ratio
• Comparison on the basis of benefits and limitations Operating Profit Ratio
• Profitability Ratio Return on Assets
• Types of Profitability Ratio Return on Equity
• Income Statement Return on Capital Employed
• Balance Sheet Return on Investment
• Gross Profit Ratio Summary

3. RATIO ANALYSIS
• Ratio analysis refers to the analysis and interpretation of the data collected
from the financial statements (i.e., Profit and Loss Statement, Balance
Sheet and Fund/Cash Flow statement etc.)
• It facilitates comparison of one figure against another. It enables the users
like managers, shareholders, investors, creditors and analysts etc. to get
better understanding of financial statements
• Ascertain strengths and weaknesses of a firm by comparing its current
financial position and historical performance

4. COMPARISON
ADVANTAGES
• It simplifies complex accounting statements and
financial data into simple ratios of profitability,
efficiency, solvency, long-term positions etc.
• It allows the company to conduct comparisons
with other firms, industry standards as well as its
own previous performance
• Ratio analysis helps identifying problem areas
and facilitates decision making to solve
LIMITATIONS
• Financial ratios completely ignore the
qualitative aspects of the firm.
• It is not relevant in itself and prove to be
useful only when compared with any other
firm or company’s own previous
performances
• Depends on financial statements which
itself suffers from certain limitations

5. PROFITABILITY RATIO
• A profitability ratio is a measure of financial ratio defining the profit percent
and return percent from the business using data from financial statements at
a specific point of time
• It assess business’s ability to generate gross profit, operating profit and net
profit from the sales using data from profit& loss statement
• It even takes into consideration various return generating ability of business in
terms of return on assets, return on capital employed, return on equity, return
on investment using data from balance sheet

6. TYPES OF PROFITABILITY RATIO
Profitablity
Ratio
Profit
Margin
Ratio
Rate of
Return
Ratio
Gross
Profit
Ratio
Net
Profit
Ratio
Operating
Profit
Ratio
Return
On
Assets
Return
On
Equity
Return On
Investmen
t
Return On
Capital
Employed

7. Revenue (Sales) 20,00,000
- Cost of goods sold (10,00,000)
= Gross Profit 10,00,000
- Factory Expenses (50,000)
- Office & Adm. Expenses (60,000)
- Selling & Distribution Expenses (20,000)
= Operating Profit (EBITDA) 8,70,000
- Interest Expenses (50,000)
= EBT 8,20,000
-Tax (40%) (3,28,000)
= Net Profit 4,92,000
INCOME STATEMENT

8. EQUITY AND LIABLITIES
Shareholder’s Fund 5,00,000
Non- current Liabilities 50,000
Current Liabilities 30,000
Total Liabilities 5,80,000
ASSETS
Non- current Assets 5,00000
Current Assets 80,000
Total Assets 5,80,000
BALANCE SHEET

9. GROSS PROFIT RATIO
• Gross Profit Ratio(GPR) is a profitability ratio that shows the relationship between
gross profit and the revenue from net sales
• Net Sales = Sales – (sales return, discounts & allowances)
• Gross profit margin is used to assess a company's financial health by defining the
amount of money left over from sales after deducting the cost of goods sold.
• GPR =
𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬
, In Percentage GPR =
𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬
* 100
• Higher the ratio better the performance of business in managing its direct cost or
generating sales

10. NET PROFIT RATIO
• The net profit ratio is equal to how much net profit is generated as a ratio of revenue
earned through sales
• This ratio shows the earnings left for shareholders as a percentage of total revenue
• It measures the overall efficiency of the business including the production,
administration, selling & distribution, tax management
• Net Profit Ratio =
𝐍𝐞𝐭 𝑷𝒓𝒐𝒇𝒊𝒕
𝐍𝐞𝐭 𝑺𝒂𝒍𝒆𝒔
, In Percentage NPR =
𝐍𝐞𝐭 𝑷𝒓𝒐𝒇𝒊𝒕
𝐍𝐞𝐭 𝑺𝒂𝒍𝒆𝒔
* 100
• Net profit margin is one of the most important indicators of a company's financial health.
• By tracking increase and decrease in its net profit margin, a company can take relevant
decisions of controlling expenses or increasing sales

11. OPERATING PROFIT RATIO
• Operating Profit Margin is a profitability ratio used to calculate the percentage of
operating profit a company produces from its operations, prior to deduction of taxes and interest
charges
• It takes into consideration operating profit which is derived after deducting all the overhead
expenses from the gross profit
• It is calculated by dividing the operating profit by total revenue from sales, and expressing as a
percentage
• Operating Profit Ratio =
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐏𝐫𝐨𝐟𝐢𝐭
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬
, In % OPR =
𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠𝐏𝐫𝐨𝐟𝐢𝐭
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬
* 100
• It measures the operational efficiency of company in managing its direct as well as indirect cost
• Higher the ratio, the better it is

12. RETURN ON ASSETS
• Return on assets (ROA) is a kind of profitability measure used to
determine returns on assets relevant when compared across the
companies or previous performance of the company
• It is an indicator of how profitable a company is relative to its total assets
utilization
• It provides relevant information to all the interested parties on company’s
efficiency in generating profit out of assets
• Return On Asset =
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
𝐀𝐯𝐠.𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
, In % ROA =
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
𝐀𝐯𝐠.𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
* 100

13. RETURN ON EQUITY
• Return on equity (ROE) is a measure of financial performance calculated by
dividing net profit by average shareholders' equity
• The return on equity is a profitability measure of a business in relation to the
funds generated through equity, also referred as net assets (assets – liabilities)
• ROE is a measure of how well a company uses investments to generate
earnings growth
• ROE =
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
𝐀𝐯𝐠.𝐓𝐨𝐭𝐚𝐥 𝐄𝐪𝐮𝐢𝐭𝐲
, In % ROE =
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
𝐀𝐯𝐠.𝐓𝐨𝐭𝐚𝐥 𝐄𝐪𝐮𝐢𝐭𝐲
* 100

14. RETURN ON CAPITAL
EMPLOYED
• Return on capital employed is a profitability ratio used in valuation of
company’s financial position depicting the return out of capital employed
• It is a useful measure for comparing the relative profitability of companies
after taking into account the amount of capital used
• ROCE =
𝐄𝐁𝐈𝐓
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝
, In % ROCE =
𝐄𝐁𝐈𝐓
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐄𝐦𝐩𝐥𝐨𝐲𝐞𝐝
* 100
• Capital Employed= Total Assets – Current Liabilities
• If ROCE is more, its better because it indicates that the company has
utilized its capital well

15. RETURN ON INVESTMENT
• Return on investment is a profitability measure used by businesses to identify the
efficiency of business in generating return out of an investment
• It may be used to compare various investment projects
• ROI =
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
, In % ROI =
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
* 100
• If an investment has a positive ROI and there are no other opportunities with a
higher ROI, then the investment should be undertaken.
• A higher ROI means that investment gains favorably compare to investment costs
incurred

16. NUMERICAL EXAMPLE
• GPR =
𝐆𝐫𝐨𝐬𝐬 𝐏𝐫𝐨𝐟𝐢𝐭
𝐍𝐞𝐭 𝐒𝐚𝐥𝐞𝐬
* 100
• From Income statement we have Gross Profit = 10,00,000
and Sales = 20,00,000
• So, GPR = 10,00,000 / 20,00,000 *100 = 50%

17. CONTINUED
• ROA =
𝐍𝐞𝐭 𝐏𝐫𝐨𝐟𝐢𝐭
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬
* 100
• From Income statement we have net profit = 4,92,000 and
from balance sheet we have total assets = 5,80,000
• ROA = 4,92,000 / 5,80,000 * 100 = 84.82 %

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