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Profitability Ratios By: Maninder Pal Singh

Profitability Ratios By: Maninder Pal Singh. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. Different measures of Profit – Gross and N et: Gross profit : Net Sales – Cost of goods sold.

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Profitability Ratios By: Maninder Pal Singh

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  1. Profitability Ratios By: Maninder Pal Singh

  2. Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return. • Different measures of Profit – Gross and Net: • Gross profit: Net Sales – Cost of goods sold. • Net Profit: Gross Profit – Total Operating Expenses.

  3. Profitability ratios includes: • Gross Profit Ratio: Gross Profit / Net sales x 100 • Operating Margin Ratio: Operating Income/ Net sales x 100 (Operating income is the difference between operating revenues and operating expenses)

  4. Net Profit Ratio: Net Profit / Net sales x 100 • Return on Investment (ROI) or Return on Owners’ Equity: Net Income / Shareholders Equity x 100 • Return on Assets (ROA): Net Income / Total Assets x 100 • Return on Capital Employed (ROCE): Net Income Before Interest and Tax / Capital Employed (Shareholders' equity represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock) (Capital Employed: Total Assets - Current Liabilities)

  5. (When evaluating investment opportunities, profits are often measured per share) • Earnings Per Share: Net Profit After Tax and Dividends / Shareholder’s Equity • Dividend Yield Ratio: Dividends per Share / Market Value per Share

  6. Profitability: • The higher the better. • Shows how effective the firm is in using its capital to generate profit. • A ROCE of 25% means that it uses every Rs.1 of capital to generate 25paise in profit. • Partly a measure of efficiency in organisation and use of capital.

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