PROFITABILITY RATIOS

RELATED TO SALES
Name :Saida Fathima
Roll no :55
Profitability ratios
◦ Profitability ratios are used to evaluate the Performance and efficiency of the
company.
◦ It is used by different stakeholders to evaluate the efficiency.
◦ Profitability ratios assess a company’s ability to earn profits from its sales or
operations, balance sheet assets, or shareholders’ equity.
◦ Profitability ratio is classified into to:-
1. Profitability ratios related to sales.
2. Profitability ratios related to investment.
Profitability ratios related to sales
1. Gross profit ratio
◦ Relation between Gross profit and revenue from operations.
◦ Also known as gross profit margin ratio
Gross profit ratio =Gross Profit ÷ Net Sales × 100
Gross profit = revenue from operations – cost of revenue from
operations
Revenue from operations= Total sales –sales return
Cost of revenue from operations= Opening stock+ Net purchases +
direct expenses – closing stock.
◦ A high ratio represents the greater profit margin and it’s good for the company.
Profitability ratios related to sales
2 Net profit ratio
◦ Relation between net profit and net sales.
◦ Also known as net profit margin ratio.
Net profit ratio=Net Profit ÷ Sales × 100
Net Profit = Gross Profit + Indirect Income – Indirect Expenses
◦ Higher ratio represents better profitability and lower ratio represents lower
profitability.
Profitability ratios related to sales
3. Operating ratio
◦ Relationship between cost of revenue from operations and operating expenses
to the net sales.
Operating ratio= operating cost ÷ net sales x 100
Operating cost = cost of revenue from operations + Operating Expenses

◦ it measures the operational efficiency of the business.

◦ Lower ratio indicates better position and high margin of profit
 Profitability ratios related to sales
4. Operating profit ratio
◦ Relation between operating profit and revenue from operations.
Operating Profit Ratio = Operating Profit / Net Sales x 100
OR
Operating profit ratio= 100 – operating ratio
Operating profit = ( gross profit – operating expenses) + operating income
◦ Higher ratio indicates better operational efficiency.
◦ It is better indicator of operational efficiency than net profit ration.
Profitability ratios related to sales
5. Expense ratio
◦ relation between various components of expenses to revenue from operations.
expense ratio= particular expense / revenue from operations x 100
◦ Higher ratio indicates lower profitability
◦ Lower ratio indicates higher Profitability
Thank you