1) Profit Ratios Based on Turnover: The various ratios under this category are as follows: A) Gross Profit Ratio

B) Net Profit Ratio

C) Operating Ratio
D) Expenses Ratio E) Operating Profit Ratio

A) Gross Profit Ratio:

Gross Profit Ratio =

Gross Profit ---------------------------- X 100 Net Sales

Gross Profit = Net Sales -General Interpretation:

Cost of Goods Sold

- Gross profit depends on prices, sales volume and costs. Any change in these factors affects gross profit. - A high gross profit ratio is a sign of good management and it also gives an idea as to how far the operating and non-operating expenses can be tolerated. - A low gross profit ratio may point towards danger signals like a higher cost of production, lower selling price and many more.

B) Net Profit Ratio:

Net Profit after tax Net Profit Ratio = ------------------------------------ X 100 Net Sales
General Interpretation: - A high net profit ratio is a good sign as it ensures sufficient return to owners, more coverage for additional expenses, etc. - A low net profit ratio gives a bad sign but the company may earn more profit by selling more quantities. Pricing in a competitive market is guided by this phenomenon. - The gross profit ratio and net profit ratio should be jointly studied to arrive at a right conclusion. Because both may show different trends. - The overall rate of return on investment can be calculated by multiplying the net profit ratio (%) with investment turnover ratio.

C)Operating Ratio: Cost of goods sold + operating expenses Operating Ratio = ----------------------------------------X100 Net Sales Operating expenses: Indirect operating expenses taken to P/L = Office & administration + Selling & Dist.exp.

D) Expenses Ratio:

Cost of goods sold a) Cost of gods sold ratio = --------------------------------------------X100 Net Sales Operating Expenses b) Operating Exp. ratio = --------------------------------------------X100 Net Sales Administrative Expenses c) Administrative Exp. ratio = ------------------------------------------X100 Net Sales Selling Expenses d) Selling Exp. Ratio = --------------------------------------------X100 Net Sales Financial Expenses e) Financial Exp. Ratio = --------------------------------------------X100 Net Sales

General Interpretation of Oper. & Exp. Ratios: - All these ratios should be compared over a number of years and should also be compared with industrial standard so as to have a meaningful conclusion. - Generally a low ratio is favorable and the vice versa. - A high expense ratio represents little margin for interest, tax and dividends. - Each item of expense should be compared over periods.

E) Operating Profit Ratio: Operating profit Ratio = Operating profit --------------------------- X 100 Net Sales

Operating profit = Net profit + Non-operating exp. Non Operating Income

General Interpretation:
- This ratio shows role of operating profit in the total sales. - A high ratio reflects a good sign.

Profit Ratios based on Investment: Profit Ratios like based on Turnover, are also measured in terms of investment, to give the position as regards efficiency aspect. For example there is a saying that every rupee invested should give optimum or maximum return. The following are the ratios broadly found under this head: A) Return on Capital Employed B) Return on Shareholders Funds C) Earning per share D) Dividend per share E) Dividend Payout Ratio F) Earning Yield Ratio G) Dividend Yield Ratio H) Price Earning Ratio

A) Return on Capital Employed:

The term Capital Employed refers to long term funds supplied by the creditors and owners of the firm. It can be determined by two ways. One by adding long term liabilities with shareholders funds and the other by adding net working capital with fixed assets. Net Profit after tax Return on Capital Employed: ------------------------------ X 100 Average Capital Employed Capital Employed = Share holders funds+ Long term loan Accumulated Loss Or Fixed Assets + Net Working Capital (Opening + Closing) Capital Empd. Average Capital Employed: ---------------------------------------------------------2

General Interpretation: - A comparison of this ratio with similar firms, with the industry average and over the years speaks about how efficiently the long term funds of the creditors and owners are being used. - The higher the ratio, the more efficient is the firm in utilizing its funds.

B) Return on Shareholders Investment:

Net Profit after tax Return on Shareholders Funds: --------------------------------- X 100 Average Shareholders Funds Share holders funds= (Equity + Preference) Share Capital + Reserves & Surplus - Accumulated Loss

(Opening + Closing) Shareholders funds Average Share. Funds: ---------------------------------------------------------2

General Interpretation: - This ratio speaks about how profitably the owners funds have been utilized. - As already stated, the ratio to be compared with industrial average and over the years, to have a meaningful conclusion.

C) Earning Per Share: Net Profit available to Equity shareholders Earning per Share: ---------------------------------------------------------------------Number of Equity Shares General Interpretation: - EPS being a widely used ratio is a measure of profitability from the owners point of view. Higher the ratio, investors will be more attracted. - Here Net Profit refers to Net Profit after taxes and preference dividend. - Higher EPS is a good sign for owners, also gives a positive impression about the company outside. - However it does not say about how much will be paid to the owners nor is how much to be retained, except how much profit theoretically belongs to the owners. - EPS of the company is compared with industrial average and over the periods, to have a meaningful conclusion.

D) Dividend Per Share: Net Distributed Profit to Equity shareholders Dividend per Share: ---------------------------------------------------------------------Number of Equity Shares General Interpretation: - It is nothing but the dividend paid to the ordinary shareholders, calculated per share basis. - Higher the ratio, investors will be more attracted. - It is better indicator than Earnings per Share as it shows the exact amount of profit received by the owners.

E) Dividend Payout Ratio: Dividend per Share Dividend Payout ratio = ------------------------------------- x 100 Earning per Share

As the ratio itself speaks, this ratio tries to establish the relationship between the profit belonging to equity shareholders and amount paid to them.
General Interpretation: - Dividend payout ratio in % when subtracted from 100, that shows the percentage of profit retained by the business. -This ratio when compared with industrial average and over the years, throw light on its reasonability. -- The ratio shows on Rs.100 of entitlement, how much is being paid.

F) Earning Yield Ratio: Earning Yield Ratio = General Interpretation: - This ratio throws light on the entitlement (theoretical) of the Equity Share holders in relation to the market value of share. - The ratio is to be compared with industrial average and over the years, to support its genuineness. EPS -------------------- X 100 Market value per Share

G) Dividend Yield Ratio:

Dividend Yield Ratio =

General Interpretation:

DPS -------------------- X 100 Market value per Share

- Higher the ratio, it is good for the company and it will attract more investors. - The ratio is to be compared with industrial average and over the years, to support its genuineness.

H) Price Earning Ratio: Market Price of share Price Earning Ratio: ------------------------------------EPS General Interpretation: - This ratio represents that for every rupee of earning per share, how much the price being paid by the market. This ratio is reviewed over the years to reflect the trend towards appreciation in the value of shares per every rupee of EPS.

This ratio is of much use in calculating the Intrinsic Value of share. Intrinsic value is very relevant for deciding whether to purchase a companys share or not.