4_ratio_analysis_formulas.doc - RATIO ANALYSIS FORMULAS Profitability ratios Gross profit ratio Net profit ratio Operating ratio Expense ratio Return on

# 4_ratio_analysis_formulas.doc - RATIO ANALYSIS FORMULAS...

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RATIO ANALYSIS FORMULAS Profitability ratios: Gross profit ratio Net profit ratio Operating ratio Expense ratio Return on shareholders investment or net worth Return on equity capital Return on capital employed (ROCE) ratio Dividend yield ratio Dividend payout ratio Earnings Per Share Ratio Price earning ratio Liquidity ratios: Current ratio Liquid /Acid test / Quick ratio Activity ratios: Inventory/Stock turnover ratio Debtors/Receivables turnover ratio Average collection period Creditors/Payable turnover ratio Working capital turnover ratio Fixed assets turnover ratio Leverage ratios or long term solvency ratios: Debt equity ratio Proprietary or Equity ratio Ratio of fixed assets to shareholders funds Ratio of current assets to shareholders funds Interest coverage or debt service ratio Capital gearing ratio Over and under capitalization Gross Profit Ratio (GP Ratio): Definition of gross profit ratio: Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. Components: The basic components for the calculation of gross profit ratio are gross profit and net sales. Net sales means that sales minus sales returns. Gross profit would be the difference between net sales and cost of goods sold . C ost of goods sold in the case of a trading concern would be equal to opening stock plus purchases, minus closing stock plus all direct expenses relating to purchases. In the case of manufacturing concern, it would be equal to the sum of the cost of raw materials , wages, direct expenses and all manufacturing expenses. In other words, generally the expenses charged to profit and loss account or operating expenses are excluded from the calculation of cost of goods sold . Formula: Following formula is used to calculate gross profit ratios: [Gross Profit Ratio = (Gross profit / Net sales) × 100] Example: Total sales = \$520,000; Sales returns = \$ 20,000; Cost of goods sold \$400,000 Required: Calculate gross profit ratio. Calculation: Gross profit = [(520,000 – 20,000) – 400,000] = 100,000 Gross Profit Ratio = (100,000 / 500,000) × 100 = 20% Significance: Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. As the gross profit is found by deducting cost of goods sold from net sales, higher the gross profit better it is. There is no standard GP ratio for evaluation. It may vary from business to business. However, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends.  #### You've reached the end of your free preview.

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• Fall '19
• Generally Accepted Accounting Principles, gross profit ratio, Equity Capital
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