This document discusses profitability ratios and their calculation. It defines profitability ratios as ratios that indicate a business's profit earning capacity. Profitability ratios are classified into general ratios like gross profit ratio and overall ratios like return on total assets. The document provides examples of common profitability ratios like net profit margin, return on assets, earnings per share and dividend per share. It then shows a sample calculation of gross profit ratio, net profit margin, operating profit margin and return on total assets for a company using example financial figures. Finally, it lists advantages and disadvantages of using ratio analysis.
4. Ratio analysis is the process of determining and
interpreting numerical relationship based on
financial statements. It is the technique of
interpretation of financial statements with the help
of accounting ratios derived from the balance sheet
and profit and loss account.
5. Profitability ratios indicate the profit earning
capacity of a business.
Profitability ratios are calculated either in
relation to sales or in relation to investments.
Profitability ratios can be classified into two
categories.
a) General Profitability Ratios.
b) Overall Profitability Ratios.
6. Gross profit ratio.
Net profit ratio.
Operating profit ratio.
Return on Total Assets
Earning per share
Dividend per share
7. Profitability Ratios
Operating Profit Margin(%)
Profit Before Interest And Tax Margin(%)
Gross Profit Margin(%)
Cash Profit Margin(%)
Adjusted Cash Margin(%)
Net Profit Margin(%)
Adjusted Net Profit Margin(%)
Return On Capital Employed(%)
Return On Net Worth(%)
Adjusted Return on Net Worth(%)
Return on Assets Excluding Revaluations
Return on Assets Including Revaluations
Return on Long Term Funds(%)
8. Gross Profit Margin
Sales --- Cost of goods sold * 100
Sales
Net Profit Margin
Net profit before Interest and tax * 100
Sales
Return on Total Assets
Net Profit after Tax * 100
Total Assets
9. Earning Per Share
Net Profit after Tax and Preference Dividend
No. of Equities
Dividend Per Share
Dividend Percentage * Face value
100
Operating Profit Margin
Cost Of Goods Sold + Operating Expenses * 100
Net Sales
10. SALES
80,00,000
LESS : COST OF GOODS SOLD
64,00,000
GROSS PROFIT MARGIN
16,00,000
LESS : DEPRECIATION 1,50,000
SELLING EXP. 2,50,000
4,00,000
PROFIT BEFORE INTEREST AND TAX
12,00,000
LESS : INTEREST
3,00,000
PROFIT BEFORE TAX
9,00,000
LESS : TAX @ 40%
11. GROSS PROFIT
= SALES – COST OF GOODS SOLD * 100
SALES
= 16,00,000 * 100 = 20%
80,00,000
Net Profit Margin
= Net profit before Interest and tax * 100
Sales
=12,00,000 * 100 = 15%
80,00,000
12. Operating Profit Margin
= Cost Of Goods Sold + Operating Expenses * 100
Net Sales
= 64,00,000 * 100 = 80%
80,00,000
Return on Total Assets
= Net Profit after Tax * 100
Total Assets
= _5,40,000 *100 = 6.75%
80,00,000
13. COMPANY
RATIO
GODREJ IDEA NTPC RAYMOND
S
COAL
INDIA
GROSS
PROFIT%
5.14 12.10 18.93 5.81 -130.73
NET
PROFIT%
8.00 6.45 14.69 3.87 91.49
RETURN
ON TOTAL
ASSETS
42.78 46.95 104.08 179.34 26.04
OPERATING
PROFIT %
6.83 27.78 24.68 11.05 -128.69
DIVIDEND
PER SHARE
1.75 0.40 5.75 2 29.00
EARNING
PER SHARE
3.57 5.09 13.31 14.36 23.76
14. ADVANTAGES
DISADVANTAGES
•It simplifies the financial statements.
•It helps in comparing companies of different size with each other.
•Different companies operate in different industries each having
different environmental conditions such as regulation, market
structure, etc.
•Ratio analysis explains relationships between past information