# Ratio Calculation From Financial Statement

Ratio Calculation From Financial Statement Profit and Loss a/c of Beta Manufacturing Company for the year ended 31st March 2010. Exercise Problem1 Kindly download this link to view the exercise. Given in pdf format. You are required to find out: a)      #Gross Profit Ratio b)      #Net Profit Ratio c)      #Operating Ratio d)      Operating #Net Profit to Net Sales Ratio a. GROSS FORFIT RATIO = Gross profit ÷ #Sales × 100 = 50,000 ÷ 1,60,000 × 100 = 31.25 % b. #NET PROFIT RATIO = Net profit ÷ Sales × 100 = 28,000 ÷ 1,60,000 × 100 = 17.5 %  c. OPERATING RATIO = #Cost of goods sold + Operating expenses ÷ Sales × 100 Cost of goos sold = Sales – Gross profit = 1,60,000 – 50,000 = Rs. 1,10,000 Operating expenses = 4,000 + 22,800 + 1,200 =  Rs. 28,000 Operating ratio = 1,10,000 + 28,000 ÷ 1,60,000 × 100 = 86.25 % d. OPERATING NET PROFIT TO NET SALES RATIO = Operating Profit ÷ Sales × 100 Operating profit = Net profit + Non-Operating expenses – Non operating income = 28,000 + 800 – 4,800 =  Rs. 32,000 Operating Net Profit to Net Sales Ratio = 32,000 ÷ 1,60,000 × 100 = 20 % What is a Financial statement? It is an organised collection of data according to logical and consistent #accounting procedure. It combines statements of balance sheet, income and retained earnings. These are prepared for the purpose of presenting a periodical report on the program of investment status and the results achieved i.e., the balance sheet and P& L a/c. Objectives of Financial Statement Analysis: To help in constructing future plans To gauge the earning capacity of the firm To assess the financial position and performance of the company To know the #solvency status of the firm To determine the #progress of the firm As a basis for #taxation and fiscal policy To ensure the legality of #dividends Financial Statement Analysis Tools  Comparative Statements Common Size Statements #Trend Analysis #Ratio Analysis Fund Flow Statement Cash Flow Statement Types of Financial Analysis Intra-Firm Comparison Inter-firm Comparison Industry Average or Standard  Analysis Horizontal Analysis Vertical Analysis Limitations Lack of Precision Lack of Exactness Incomplete Information Interim Reports Hiding of Real Position or Window Dressing Lack of Comparability Historical...

# Profitability Ratios

PROFITABILITY RATIOS The profitability ratio of the firm can be measured by calculating various profitability ratios.  General two groups of profitability ratios are calculated. Profitability in relation to sales. Profitability in relation to investments. Profitability in relation to sales Gross profit margin or ratio Net profit margin or ratio Operating profit margin or ratio Operating Ratio Expenses Ratio  1.  GROSS PROFIT MARGIN OR RATIO It measures the relationship between gross profit and sales.  It is calculated by dividing gross profit by sales. Gross profit margin or ratio =    Gross profit X 100 / Net sales Gross profit is the difference between sales and cost of goods sold. 2.  NET PROFIT MARGIN OR RATIO It measures the relationship between net profit and sales of a firm.  It indicates management’s efficiency in manufacturing, administrating, and selling the products.  It is calculated by dividing net profit after tax by sales.  Net profit margin or ratio =      Earning after tax  X  100 / Net Sales 3.  OPERATING PROFIT MARGIN OR RATIO It establishes the relationship between total operating expenses and net sales.  It is calculated by dividing operating expenses by the net sales. Operating profit margin or ratio = Operating costs  X  100 / Net sales (0r) Cost of goods sold + Operating expenses * 100 / Net sales Operating expenses includes cost of goods produced/sold, general and administrative expenses, selling and distributive expenses. 4.  EXPENSES RATIO While some of the expenses may be increasing and other may be declining to know the behavior of specific items of expenses the ratio of each individual operating expenses to net sales should be calculated.  The various variants of expenses are Cost of goods sold = Cost of goods sold  X  100 / Net Sales Administrative Expenses Ratio = Administrative Expenses  X  100 / Net sales Selling and distribution expenses ratio =Selling and distribution expenses  X  100 / Net sales  5.  OPERATING PROFIT MARGIN OR RATIO Operating profit margin or ratio establishes the relationship between operating profit and net sales.  It is calculated by dividing operating profit by sales. Operating profit margin or ratio = Operating Profit X 100 / Net sales Operating profit is the difference between net sales and total operating expenses.  (Operating profit = Net sales – cost of goods sold – administrative expenses – selling and distribution...