Page 203 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes Since the value of the dividend coverage ratio is quite high, the company has a strong cushion for
the payment of preference dividend.

Self Assessment

Choose the right answer

11. Solvency position of the firm studied and interpreted through
(a) Short-term solvency ratios (b) Long-term solvency ratios

(c) Coverage ratios (d) (a), (b) & (c)

12. Efficiency and effectiveness of the firm is studied through
(a) Liquidity ratios (b) Leverage ratios
(c) Turnover ratios (d) Profi tability ratios
13. Standard norm of the Debt to Capital
(a) 1:2 (b) 1:1
(c) 2:1 (d) 1:5

11.6 Profi tability Ratios

These ratios are measurement of the profitability of the firms in various angles, viz.:

1. On sales
2. On investments
3. On capital employed and so on

While discussing the measure of profitability of the firm, the profits are normally classifi ed into

various categories:
1. Gross Profi t
2. Net Profi t
3. Operating Profi t Ratio
4. Return on Assets Ratio
5. Return on Capital Employed

All profitability ratios are normally expressed only in terms of (%). The return is normally
expressed only in terms of percentage which warrants the expression of this ratio to be also in
percentage.
11.6.1 Gross Profi t Ratio

The ratio elucidates the relationship in between the gross profit and sales volume.

It facilitates to study the profit earning capacity of the firm out of the manufacturing or trading
operations.
Gross Profit
Gross Profit Ratio = ×100

Sales
Example: Om enterprises has earned a gross profi t of ` 6,00,000 in the fi rst quarter.

Calculate the gross profit ratio if the corresponding sales amounted to a value of ` 30,00,000.
What does it imply?

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