Profitability Ratio : The main object of All the Business Concerns is to Earn Profit . Profit is the Measurement of the Efficiency of the Business . Profitability Ratios Measure the Various Aspects of the Profitability of a Company, such as :
- What is the Rate of Profit on Revenue from Operations ?
Whether the Profit are Increasing or Decreasing.
Gross Profit Ratio : This Ratio establishes a Relationship between ***** Profit and Revenue from Operations i.e. Net Sales . This Ratio is Computed and Presented in Percentage . Formula for Computing this Ratio is :
Gross Profit Ratio = ***** Profit/Re venue from Operations (i.e. Net Sales) x 100
Significance of ** Profit Ratio : This Ratio measures the Margin of Profit available on Revenue from Operations. The Higher the Profit Ratio, the Better it is . No Ideal Standard is Fixed for the Ratio , but the *** Profit Ratio should be Adequate Enough Not only to Cover the Operating Expenses, but also to provide for Depreciation, Interest on Loans, Dividends and Creation of Reserves.
Operating Profit Ratio : This Ratio shows the Relationship between Operating Profit and Net Revenue from Operations .
Operating Profit Ratio = Operating Profit/Re venue from Operations x 100
Significance of Operating Profit Ratio : This Ratio Measures the Rate of Net Profit Earned on Revenue from Operations . It helps in distinguishing the Overall Efficiency of the Business Operations . An Increase in the Ratio over the Previous Year Shows Improvement in the Overall Efficiency and Profitability of the Business .
