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Profitability Ratios:

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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 profitability ratios:

(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 ratio.

(2) Operating Profit Ratio:

Operating net profit ratio is calculated by dividing the operating net profit by sales. Read more about operating profit ratio.

(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.

More study material from this to

More study material from this topic:

Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratio
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis



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