financial management - financial accounting - management accounting - analysis and interpretation of financial statements

1. Dr. Mohamed Kutty Kakkakunnan
Associate Professor
P G Dept. of Commerce
N A M College Kallikkandy
Kannur – Kerala - India

2. PROFITABILITY RATIOS
• Primary objective – profit
• ‘Profit is the engine that drives the business enterprise’ – Lord
Keynes
• Profit – for survival and growth
Two categories
1. General Profitability Ratios and
2. Overall Profitability Ratios
General Profitability Ratios
i. Gross Profit Ratio
ii. Operating Ratio (operating expenses ÷ net sales)
iii. Operating Profit Ratio
iv. Expenses Ratios
v. Net Profit Ratio
These ratios are calculated on the basis of sales and will be
expressed as percentage

3. Overall Profitability Ratios
These ratios study the profitability on the basis on
investment
1. Return on Shareholders Fund or Net Worth
Ratio
2. Return on Equity Capital
3. Return on Capital Employed
4. Capital turn Over Ratio
5. Earnings Per Share
6. Dividend Yield Ratio
7. Dividend Payout Ratio
8. Price Earning Ratio or Earning Yield Ratio

4. Return on Share Holders’ Fund
Share holders’ fund = Equity Share Capital +
Preference Share Capital + All Reserves and
Surpluses – Accumulated Losses and
Fictitious assets, if any
Return On Equity Capital

5. Return on Capital Employed / Return on
Investment
Expresses the relationship between return
(profits or earnings) and capital employed
There are different definitions to the term
capital employed
1. Gross capital employed
2. Net capital employed
3. Proprietors’ net capital employed

6. Gross capital employed = Total Assets (fixed assets and
current assets)
Net capital employed = Total Assets – Current Liabilities
Or
Fixed assets + working capital
Proprietors net capital employed = Shareholders’ Fund
Return in case of the first two definition will be the EBIT
or Net Operating Profit
Return in the third definition will be the Profits available
to share holders

7. Capital Turnover Ratio
• Expresses the relationship between Cost of Goods Sold
(Sales when information about cost of goods sold is not
available) and the Capital Employed
• Calculated to ascertain the efficiency in the use of capital
• Shows the speed or velocity or briskness with which capital
is used in the business
• Higher the ratio better the efficiency
• Generally expressed in “times”