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 Gross 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 = Gross Profit/Re venue from Operations (i.e. Net Sales) x 100
Significance of Gross Profit Ratio : This Ratio measures the Margin of Profit available on Revenue from Operations. The Higher the Gross Profit Ratio, the Better it is . No Ideal Standard is Fixed for the Ratio , but the Gross 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 .
