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.


Gross Profit Margin=
Gross Profit
X 100
Sales turnover

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.


Net Profit Margin=
Net Profit
X 100
Sales turnover

Mark up cost refers to profit expressed as a percentage of cost price.


Mark Up=
Gross Profit
X 100
Cost of goods sold

Rate of return on Capital (ROCE)

It shows the return on the investment made by the owner.


Return on Capital employed=
Net Profit
X 100
Capital

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