Profitability Ratio Analysis & Example

List of profitability ratios and formulas:

1) Gross Profit ratio = (Gross profit / Net sales) * 100 %
2) Net Profit ratio = (Net profit / Net sales) * 100 %
3) Operating profit margin = Operating income / Net sales
4) Return on Capital Employed = (Profit before interest / Capital employed) * 100 %
5) Return on Equity (ROE) = Net income / Average shareholders equity
6) Return on Assets (ROA) = Net income / Total assets
7) Cash flow return on investment (CFROI) = Cash flow / Market recapitalisation
8) Risk adjusted return on capital (RAROC) = Expected return / Economic capital
9) Return on net assets = Net income / Net assets

Example:
Calculate the profitability ratios, given the following figures:
Stock at the start of the year: $10,000
Stock at the end of the year: $6,000
Sales: $18,000
Sales returns: $3,000
Purchases: $2,000
Overhead expenses: $3,000
Capital at start of year: $17,000
Capital at end of year: $15,000

Solution:

Net sales = $18,000 - $3,000 = $15,000

Cost of sales = Stock at start + Purchases - Stock at end = 10,000 + 2,000 - 6,000 = $6,000

Gross profit = Net sales - Cost of sales = $15,000 - $6,000 = $9,000

Gross profit ratio = (9,000 / 15,000 ) * 100% = 60 %

Net profit = Gross profit - overhead expenses = 9,000 - 3,000 = $6,000

Net profit ratio = (6,000 / 15,000 ) * 100% = 40 %

Average capital employed = 1/2 (Capital at start + Capital at end) = 1/2 (17,000+15,000) = $16,000

ROCE = (6,000 / 16,000) * 100% = 37.5%

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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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