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Unit 11: Ratio Analysis
Solution: Notes
Gross Profit 6,00,000
Gross Profit Ratio = × 100 = × = 100 20 : 1
Sales 30,00,000
The ratio implies that the firm has earned good profits out of sales in the fi rst quarter.
!
Caution Standard norm of the ratio:
Higher the ratio means that the firm has greater cushion in meeting the needs of preference
dividend payment against Earnings After Taxation (EAT) and vice versa.
11.6.2 Net Profi t Ratio
The ratio expresses the relationship in between the net profit and sales volume. It facilitates to
portray the overall operating efficiency of the firm. The net profit ratio is an indicator of over all
earning capacity of the firm in terms of return out of sales volume.
Net Profit
Net Profit Ratio = ×100
Sales
Example: Om enterprises has earned a net profi t of ` 3,00,000 in the first quarter. Calculate
the net profit ratio if the corresponding sales amounted to a value of ` 30,00,000. What does it
imply?
Solution:
Net Profit 30,000
Net Profit Ratio = × = 100 × = 100 1 : 1
Sales 30,00,000
The ratio shows that the company is running on a no profit - no loss state.
!
Caution Standard Norm of the Ratio:
Higher the ratio, the better the position of the firm is, which means that the fi rm earns
greater profits out of the sales and vice versa.
11.6.3 Operating Profi t Ratio
The operating ratio is establishing the relationship in between the cost of goods sold and operating
expenses with the total sales volume.
Cost of Goods Sold + Operating Expenses
Operating Ratio = ×100
Net Sales
Example: The cost of goods sold by Mangamal operators is ` 2,000. What will be the
operating ratio of the firm if the operating expenses are ` 50,000 and net sales is that of ` 5,00,000?
What does it mean?
Solution:
Cost of goods sold + Operating expenses 2,000 + 50,000
Operating Ratio = × = 100 = 1 : 2
Net sales 5,00,000
Since the ratio is quite low, this means that the firm is in quite favourable position and thus has
a high margin of operating profi t.
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