Profitability Ratios
1. Gross Profit Ratio
Gross Profit Ratio = Gross Profit/Net Sales × 100
Significance: It indicates gross margin or mark-up on products sold. There is no standard norm for its comparison. It also indicates the margin available to cover operating expenses, non-operating expenses, etc. Change in gross profit ratio may result from change in selling price or cost of sales or a combination of both. A low ratio may indicate unfavourable purchase and sales policy. It must be interpreted carefully as valuation of stock also affects its computation. Higher gross profit ratio is always a good sign.
2. Net Profit Ratio
Net Profit Ratio = Net profit / Sales × 100
Significance: It is a measure of net profit margin in relation to sales. Besides revealing profitability, it is the main variable in computation of Return on Investment. It reflects the overall efficiency of the business, assumes great significance from the point of view of investors.
3. Return on Capital Employed or Investment (ROCE or ROI)
Return on Investment (or Capital Employed) = Profit before Interest and Tax / Capital Employed × 100
Significance: It measures return on capital employed in the business. It reveals the efficiency of the business in utilisation of funds entrusted to it by shareholders, debenture-holders and long-term liabilities. For inter-firm comparison, return on capital employed which reveals overall utilisation of fund is considered good measure of profitability. It also helps in assessing whether the firm is earning a higher return on capital employed as compared to the interest rate paid.
4. Return on Shareholders’ Fund
Return on Shareholders’ Fund = Profit after Tax
Shareholders Fund
5. Book Value Per Share
Book Value per share = Equity shareholders’ funds/No. of Equity Shares
6. Dividend Payout Ratio
Dividend Payout Ratio = Dividend Per Share
Earnings Per Share
7. Price Earning Ratio
P/E Ratio = Market price of a Share/Earnings per Share
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