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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