_{PROFITABILITY RATIOS �OR�INCOME RATIOS}

CLASS XII

1. GROSS PROFIT RATIO

FORMULAE = GROSS PROFIT / REVENUE FROM OPERATION *100

GROSS PROFIT = REVENUE FROM OPERATION – COSTS OF REVENUE FROM OPERATION

Higher The Ratio, Better it is for the Firm

EXCERCISE

1. CACULATE GROSS PROFIT RATIO

OPENING INVENTORIES 50000

PURCHASES 150000

RETURNS OUTWARDS 20000

WAGES 10000

REVENUE FROM OPERATION 250000

CLOSING INVENTORIES 40000

SOLUTION:

​

Gross Profit Ratio = Gross Profit x 100 Revenue from Operations

Gross Profit = Revenue from Operations – Cost of Revenue from Operations

Cost of Revenue from Operations = Opening Inventories + Purchases

– Returns Outwards + Wages – Closing Inventories

​

= ₹ 50,000 + ₹1,50,000 - ₹20,000 + ₹10,000 - ₹40,000

= ₹ 1,50,000

Gross Profit = ₹ 2,50,000 - ₹1,50,000 = ₹ 1,00,000

Working Capital Turnover Ratio = 1,00,000 x 100 = 40%

2,50,000

2. NET PROFIT RATIO

FORMULAE = NET PROFIT AFTER TAX

---------------------------------------- * 100

REVENUE FROM OPERATION

NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES AND LOSSES+ OTHER INCOME – TAX

INDIRECT EXPENSES AND LOSSES = OFFICE EXPENSES + SELLING

EXPENSES +INTEREST ON LONG TERM BORROWINGS +ACCIDENTAL LOSSES

EXCERCISES

1. Calculate net profit ratio

Revenue from operations 200000

Gross profit 75000

Office expenses 15000

Selling expenses 26000

Interest on debentures 5000

Accidental losses 12000

Income from rent 2500

Commission received 2000

SOLUTION:

​

Net Profit Ratio = Net Profit x 100 Revenue from Operations

Net Profit = Gross Profit – Indirect Expenses & Losses

+ Other Incomes

Indirect Expenses and Losses = Office Expenses + Selling Expenses

+ Interest on Debentures + Accidental Losses

​

= ₹ 15,000 + ₹26,000 + ₹5,000 + ₹12,000

= ₹ 58,000

Other Incomes = Income from Rent + Commission Received

= ₹2,500 + ₹2,000 = ₹4,500

Net Profit = ₹ 75,000 - ₹58,000 + ₹4,500 = ₹ 21,500

Revenue from Operations = ₹2,00,000

Working Capital Turnover Ratio = 21,500 x 100 = 10.75%

2,00,000

3. OPERATING RATIO

FORMULAE = COST OF REVENUE FROM OPERATION + OPERATING EXPENSES – OPERATING INCOME --------------------------------------------------------------------------------------- * 100

REVENUE FROM OPERATIONS

Operating Expenses = Employee Benefit Expenses + depreciation And Amortization Expenses

+ Other Expenses (Office And Administration Expenses +Bad Debts

+Interest On Short Term Loans +Selling And Distribution Expenses +Discounts)

Operating Income = Trading Commission Received, Cash Received

Lower The Ratio Better It Is For The Firm

Calculate ‘Operating Ratio’ from the following information:

SOLUTION:

​

Operating Ratio = Cost of Revenue from Operations + Operating Expenses x 100 Net Revenue from Operations

​

Cost of Revenue from Operations = Net Revenue from Operations – Gross Profit

= ₹ 8,00,000 – 20% of 8,00,000

= ₹ 8,00,000 - ₹1,60,000 = ₹6,40,000

Operating Expenses = Office & Selling Expenses + Depreciation

Gross Profit = ₹ 60,000 + ₹20,000 = ₹ 80,000

Operating Ratio = 6,40,000 + 80,000 x 100 = 90%

8,00,000

​

Note: Net Revenue from Operations means Credit Revenue from Operations + Cash Revenue from Operations – Revenue from Operations Return

4. OPERATING PROFIT RATIO

​

FORMULAE = OPERATING PROFIT

------------------------ * 100

REVENUE FROM OPERATION

Calculate ‘Operating Profit Ratio’ from the following information:

SOLUTION:

Operating Profit Ratio = Operating Profit x 100 Revenue from Operations (Sales)

If Cost of Revenue from Operations is ₹100, Gross Profit = ₹25

And Revenue from Operations (Sale) will be ₹100 + ₹ 25 = ₹125

When Revenue from Operations is ₹125, Gross Profit = ₹25

When Revenue from Operations is ₹8,00,000,

Gross Profit = ₹ 8,00,000 x 25 = ₹ 1,60,000

125

Operating Expenses = Office & Administrative Expenses + Selling Expenses

= ₹20,000 + ₹28,000 = ₹48,000

Operating Profit = Gross Profit – Operating Expenses

= ₹1,60,000 - ₹48,000 - ₹1,12,000

Operating Profit Ratio = 1,12,000 x 100 = 14%

8,00,000

5. RETURN ON INVESTMENT

THIS RATIO REFLECTS THE OVERALL PROFITABILITY OF THE FIRM.

Also Known As Rate Of Return, Return On Capital Employed, Yield On Capital

FORMULAE = NP BEFORE INTEREST ,TAX AND DIVIDENDS

------------------------------------------------------------ * 100

CAPITAL EMPLOYED

LIABILITIES SIDE APPROACH

CAPITAL EMPLOYED= LONG TERM BORROWINGS +LONG TERM PROVISIONS

ASSETS SIDE APPROACH

CAPITAL EMPLOYED = NON CURRENT ASSETS + WORKING CAPITAL

Calculate ‘Return on Investment’ or Return on Capital Employed

from the following information:

Net Profit before tax ₹60,000

SOLUTION:

​

Return on Investment or Return on Capital Employed

= Net Profit before interest and tax x 100 Capital Employed

​

Net Profit before tax = ₹ 60,000

Add: Interest : 12% ON ₹2,00,000 = ₹ 24,000

Net Profit before interest and tax = ₹ 84,000

​

Capital Employed = Share Capital + Reserves & Surpluses + 12% long term borrowings

= ₹ 50,000 + ₹ 25,000 + ₹ 2,00,000 = ₹ 2,75,000

Return on Investment or Return on Capital Employed

= ₹84,000 X 100 = 30.55%

₹2,75,000

Calculate ‘Return on Investment’ or Return on Capital Employed

from the following information:

SOLUTION:

​

Return on Investment or Return on Capital Employed

= Net Profit before interest and tax x 100 Capital Employed

​

Calculation of Net Profit before interest and tax =

Net Profit After Tax = ₹ 1,00,000

Net Profit Before Tax = 1,00,000 x 100/80 = ₹1,25,000

​

Net Profit before interest and tax = ₹ 1,25,000 + Interest ₹40,000

= ₹ 1,65,000

​

Capital Employed = Fixed Assets + Current Assets - Current Liabilities

= ₹ 6,00,000 + ₹ 4,00,000 - ₹ 2,00,000 = ₹ 8,00,000

Return on Investment or Return on Capital Employed

= ₹1,65,000 X 100 = 20.625%

₹8,00,000

THANK YOU!