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Profitability ratios
The document by Dr. Mohamed Kutty Kakkakunnan discusses profitability ratios, emphasizing their importance for business survival and growth. It categorizes these ratios into general and overall profitability ratios, detailing various formulas and definitions for calculating them based on sales and investments. Key ratios include gross profit ratio, return on equity, and capital turnover ratio, which measure efficiency in capital usage.
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Profitability ratios
- 1. Dr. Mohamed KuttyKakkakunnan Associate Professor P G Dept. of Commerce N A M College Kallikkandy Kannur – Kerala - India
- 2. PROFITABILITY RATIOS • Primaryobjective – 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 Theseratios 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 ShareHolders’ 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 CapitalEmployed / 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”