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.

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