The main object of a business concern is to
earn profit. In general terms, efficiency in business is measured by
profitability. A low profitability may arise due to lack of control over the
expenses. Bankers financial institutions and other creditors look at the
profitability ratios as an indicator whether or not the firm earns substantially
more than it pays interest for the use of borrowed funds and whether the
ultimate repayment of their debt appears reasonably certain. Owners are also
interested to know the profitability as it indicates the return which they can
get on their investments.
Following are some of the most important
(1) Gross Profit Ratio:
Gross profit ratio is the ratio of gross profit
to net sales i.e. sales less sales returns.
Read more about gross profit
(2) Operating Profit Ratio:
Operating net profit ratio is calculated by
dividing the operating net profit by sales.
Read more about operating
(3) Net Profit Ratio:
Net profit ratio expresses the relationship
between net profit after taxes and sale.
Read more about net profit ratio.
(4) Operating Ratio:
This ratio is determined by comparing the cost
of the goods sold and other operating expenses with net sales.
Read more about operating ratio.
(5) Expense Ratio:
Expense ratios are calculated to ascertain the
relationship that exists between operating expenses and volume of sales: Expense
ratios are calculated by dividing each item of expense or group of expenses with
the net sales so analyze the cause of variation of the operating ratio.
Read more about gross profit ratio.