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Explain profitability group ratios.
Under this group following ratios are calculated with an intention to know the profitability of the organization.
- Gross Profit Ratio indicates the relation between production cost and sales and the efficiency with which the goods are produced or purchased. A high gross profit ratio indicates that the organization is able to produce at a relatively lower cost.
Formula to calculate Gross Profit Ratio = (Gross Profit/ Net Sales) X 100
- Net Profit Ratio indicates that portion of the sales which is left out with the owners after considering all types of expenses and costs either operating or non operating or normal or abnormal. A high net profit ratio will be desirable as it indicates higher profitability of the business.
Formula to calculate Net Profit Ratio = (Net profit after taxes/ Net Sales) X 100
- Operating Ratio indicates the percentage of net sales which is absorbed by the operating costs. A low operating ratio will always be desirable.
Formula to calculate Operating Ratio = {(Manufacturing cost of goods sold + Operating Expenses)/Net Sales} X 100
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