It is also known as income ratio. The objective of every organisation is to earn profit and hence the organisations would definitely want to keep a track on various aspects of profit like operating profit, net profit etc. Therefore, they prepare and compute the profitability ratios.

The different types of profitability ratios are:

- Gross Profit Ratio
- Operating Ratio
- Net Profit Ratio
- Operating Profit Ratio
- Earning Per Share

### Profitability Ratios – Gross Profit Ratio

This ratio establishes a relationship between Gross profit and revenue from Operations i.e. Net Sales.

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

Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage Inward + Wages + Other Direct Charges – Closing Inventory

### Profitability Ratios – Operating Ratio

This ratio compares an enterprise’s cost of revenue from operations and operating expenses to its revenue from operations.

Cost of Revenue from Operations = Opening Inventory + Purchases + Carriage Inward + Wages + Other Direct Charges – Closing Inventory

Operating Expenses = Employee Benefit Expense + Depreciation Expense + Other Expense

### Profitability Ratios – Net Profit Ratio

This ratio establishes a relationship between Net profit and revenue from Operations i.e. Net Sales.

### Profitability Ratios – Operating Profit Ratio

Operating Profit = Gross Profit – Other Operating Expenses + Other Operating Incomes

### Profitability Ratios – Earning Per Share

Earning per share helps in calculating the profitability of the company.

**Calculation of Earning Per Share**

**Profitability Ratios – Questions 1 : –**

On the basis of the following data calculate earning per share

**Explanation: –**

EBIT = 800000

Less: Interest on Debentures = 200000

EBT = 600000

Less: Tax = 150000

EAT = 450000

Less: Preference Dividend = 300000

Earnings for Equity Shareholders = 150000

Less: Retained Earnings = 75000

Dividend Paid = 75000

= 150000/300000

= 0.5 Per share

**Gross Profit Ratio, Operating Ratio & Operating Profit Ratio**

**Profitability Ratios – Question 2 : –**

The following information is given

If Revenue from Operations of XYZ Ltd is Rs. 1000000 Cost of Revenue from Operations is Rs. 450000 Selling Expense is Rs. 80000 Administrative Expenses is Rs. 60000

Calculate- Gross Profit Ratio ,Operating Ratio , Operating Profit Ratio

**Explanation : –**

Gross Profit Ratio= 550000/1000000 x 100 = 55%

Operating Ratio = 590000/1000000 x 100

Operating Ratio = 59 %

= 100 (-) Operating Ratio

= 100 (-) 59

Operating Profit Ratio = 41 %

Working Notes:

Gross Profit = Revenue from Operations (-) Cost of Revenue from Operations

Gross Profit = 1000000 (-) 450000

Gross Profit = 550000

Operating Cost = Cost of Revenue from Operations + Selling Expenses + Administrative Expenses

Operating Cost = 450000 + 80000 + 60000

Operating Cost = 590000

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