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Ratios can be broadly classified as:
Profitability ratios
These ratios measure the profit in relation to sales or capital employed.
Gross profit margin
Gross Profit Margin shows the relationship of gross profit and sales turnover.
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Gross Profit Margin= |
Gross Profit
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X 100
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Sales turnover
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A lower ratio may be the result of the following factors:
- Decrease in selling price of goods sold
- Increase in cost of goods sold
- Over valuation of opening stock or under valuation of closing stock
Net profit margin
It is an index of efficiency and profitability of a business.
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Net Profit Margin= |
Net Profit
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X 100 |
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Sales turnover
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Mark up cost refers to profit expressed as a percentage of cost price.
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Mark Up= |
Gross Profit
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X 100
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Cost of goods sold
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Rate of return on Capital (ROCE)
It shows the return on the investment made by the owner.
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Return on Capital employed= |
Net Profit
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X 100
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Capital
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