The document discusses profitability ratios that assess a company's ability to generate profits from its operations, comparing various types including gross profit, net profit, operating profit, return on assets, and return on equity. It explains how these ratios can evaluate efficiency in asset utilization, operational performance, and overall profitability, which are useful for investors and creditors. Additionally, the document mentions turnover ratios related to inventory and asset management, providing formulas and insights on measuring business efficiency and financial health.

2. Introduction
Profitability ratios compare income
statement accounts and categories to show a
company's ability to generate profits from
its operations. Profitability ratios focus on a
company's return on investment in
inventory and other assets. These ratios
basically shows how well companies can
achieve profits from their operations.

3. ......
Investors and creditors can use it to judge a
company's return on investment based on its
relative level of resources and assets.
it can be used to judge whether companies
are making enough operational profit from
their assets.
it relate to efficiency ratios because they
show how well companies are using their
assets to generate profits.

4. Definitions
“The ratios that measure the capacity of a
firm to generate profits out of the expenses
and the other cost incurred over a period are
called the profitability ratios”.
“The Profitability Ratios measure the
overall performance of the company in
terms of the total revenue generated from its
operations”.

5. Types of Profitability Ratio
Gross profit Ratio
Operating profit Ratio
Net profit Ratio
Return on Assets
Return on Equity
Return on capital employed

6. Gross profit Ratio
The gross profit ratio looks at cost of goods
sold as a percentage of sales. This ratio
looks at how well a company controls the
cost of its inventory and the manufacturing
of its products and subsequently pass on the
costs to its customers. The larger the gross
profit ratio the better for the company.

7. Benefits
Gross ratio measures a company's
manufacturing and distribution
efficiency during the production process.
Investors use the gross profit ratio to
compare companies in the same industry
and also in different industries to determine
what are the most profitable.
A company that boasts a higher gross ratio
than its competitors and industry is more
efficient.

8. Formula
gross profit = net revenue from operations
- direct expenses
cost of material consumed
purchses+o.s.-cl.s.
+ direct wages
+ carriage inward
Gross profit ratio = Gross profit *100
sales

9. Net profit Ratio
Net profit Ratio is the percentage
of revenue remaining after all operating
expenses, interest, taxes and have been
deducted from a company's total revenue.
that shows relationship between net profit
after tax and net sales.

10. ......
Total revenue-total expenses (Net Profit)*100
sales
It shows how good a company is at
converting revenue into profits available for
shareholders.
Net profit ratio is often used to compare
companies within the same industry.

11. Using the formula
and the
information
above, we can
calculate that
Company XYZ's net
profit ratio was
30,000/100,000*100
= 30%
Income statement of company XYZ for
the year ended 2015
Total
revenue
₹100000
- Cost of
goods sold
₹20000
Gross profit ₹80000
-operating
expanses
salaries ₹10000
rent ₹10000
utilities ₹5000
depreciation
₹5000 ₹30000
Interest
expanses
₹10000
Tax ₹10000 ₹20000
Net profit ₹30000

12. Operating Profit Ratio
Operating ratio is a measurement of what
proportion of a company's revenue is left
over after paying for variable costs of
production such as wages, raw materials.
it is earnings before interest and taxes.
It is a measure of overall operating
efficiency, incorporating all of the expenses
of ordinary, daily business activity.

13. Operating profit=
Net sales - (Cost of goods sold +
Administrative and office expenses +
Selling and distribution exp.)
Operating ratio = Operating Income*100
Net Sales

14. Benefits
operating ratio may be used to investigate a
particular project or compare multiple
projects within a company.
a higher operating profit margin is desirable
as it suggests greater potential to derive
profits and more cushion against any
increase in competition or costs.

15. Return on Assets
Return on assets is an indicator of how
profitable a company is relative to its total
assets. it gives an idea as to how efficient
management is at using its assets to
generate earnings.
It display as a percentage. Sometimes this is
called as return on investment.

16. .....
Return on Assets = Net income*100
Total assets
ROA tells you what earnings were generated
from invested capital (assets).
it gives investors an idea of how effectively the
company is converting the money it has to invest
into net income.

17. Return on Equity
Return on equity (ROE) is the amount
of net income returned as a percentage
of shareholders equity. Return
on equity measures a corporation's
profitability by revealing how much profit a
company generates with the money
shareholders have invested.

18. .....
Return on Equity = Net Income
Shareholder's fund
It shows that the company is doing a good
job using the investors' money.
ROE is also and indicator of how effective
management is at using equity financing to
fund operations and grow the company.

19. Return on capital Employed ratio
Return on capital employed is a profitability
ratio that measures how efficiently a
company can generate profits from its
capital employed by comparing net
operating profit to capital employed.

20. ......
ROCE = Net Profit
Capital employed
• it shows how effectively assets are
performing while taking into consideration
long-term financing.
• to evaluate the longevity of a company.
• It also shows that how efficiently a
company uses its capital employed as well
as its long-term financing strategies.

21. Turn Over (activity) Ratio
The turnover ratio is the percentage of a
mutual fund or other investment's holdings
that have been replaced in a given year,
which varies by the type of mutual fund,
its investment objective and/or the portfolio
manager's investing style.
Turnover ratio is a measure of how a fund's
portfolio changes in a year. This ratio
indicates how much a fund is trading.

22. Benefits
It helps an investor determine the fund’s
expected performance in the future.
A high turnover results in increased costs
for the fund and decreased returns for
shareholders due to shareholders paying
spreads and commissions when buying and
selling stocks.

23. Types of Turn over Ratios
1. Inventory turnover ratio
2. Debtors turnover ratio
3. Creditors turnover ratio
4. Fixed asset turnover ratio
5. Current assets turnover ratio
6. Capital employed turnover ratio

24. Inventory turnover Ratio
Inventory turnover ratio is also known as
stock turnover ratio
Inventory turnover ratio shows the
relationship between the cost of good sold
and the average inventory.
Inventory turnover is a ratio showing how
many times a company's inventory is sold
and replaced over a period of time.

25. Inventory turnover ratio = cost of goods sold
average stock
• Cost Of Good Sold = Opening stock+ Purchases+Carriage
inward+Direct wages and expenses- Closing Stock
• Cost Of Good Sold =Sales - Gross profit
• Average stock = (Opening stock + closing stock)/2
A higher ratio would indicate that company is
able to sell its products quickly.
a lower ratio would imply that has not been
efficient in its work.

26. Debtors turnover ratio
Debtors turnover ratio is also called
receivable turnover ratio.
It measures how effectively the company is
collecting the cash from its creditors for
goods sold on credit by the company.

27. Debtors Turnover Ratio = Net credit sales
average account receivable
*account receivable includes 'trade debtors and
bills receivable'.
A high ratio would indicate that company is able to
collect cash from its creditors quickly.
low ratio would imply that company needs some
work as far as collection department is concerned.

28. Creditors turnover ratio
It is also called account payable turnover ratio
It measures how quickly the company pays
its creditors for goods purchased by the
company on credit.
creditors turnover Net credit purchase
ratio = average creditors

29. Account payable = trade creditors + bills payable
A high ratio would indicate that company is paying
its creditors quickly
while a lower ratio would imply that company is not
able to pay creditors on time which in turn will
indicate worsening financial position of the
company.

30. Fixed assets turnover ratio
It is also termed as the ratio of sales to fixed
assets.
It indicates how efficiently the fixed assets
are used.
It measures the efficiency with which the
firm has been using its fixed assets to
generate sales.

31. Fixed Assets = Net sales
Turnover ratio gross fixed asset –depreciation
A higher ratio would imply that company is using
fixed asset to generate more sales.
while a lower ratio would imply that company has
been inefficient in using the fixed assets.

32. Current asset turnover ratio
It signifies the total sales done by the
company with an investment in the current
asset.
Current assets turnover ratio shows the
relationship between net sales and current
assets.

33. Current asset turnover ratio = net sales
current asset
A higher ratio implies that company has been
successful in utilizing the current assets;
current assets include cash, stocks,
debtors, prepaid expense and so on.

34. Capital employed turnover ratio
It shows how efficiently the sales are
generated from the capital employed by the
firm.
It helps the investors or the creditors to
determine the ability of a firm to generate
revenues from the capital employed and act
as a key decision factor for lending more
money to the asking firm.

35. Capital employed = Net sales
turn over ratio capital employed
Where, Capital Employed = Net worth + Long-term
Borrowings
Net Worth = Share Capital + All Reserves
Higher the ratio better is the utilization of capital
employed and shows the ability of the firm to
generate maximum profits with the minimum
amount of capital employed.