Page 129 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes
Example: Hindustan Manufacturers have to make a preference dividend of 60,000.
The earnings after taxation is 3,00,000. What will be the Dividend coverage ratio? What does it
mean?
Solution:
Earnings After Taxation 3,00,000
Dividend Coverage Ratio = 5 : 1
Preference Dividend 60,000
Since the value of the dividend coverage ratio is quite high, the company has a strong cushion
for the payment of preference dividend.

6.3.3 Profitability 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 classified into
various categories:

1. Gross Profit
2. Net Profit
3. Operating Profit 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.

Gross Profit 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 profit of 6,00,000 in the first quarter.
Calculate the gross profit ratio if the corresponding sales amounted to a value of 30,00,000.
What does it imply?
Solution:
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 first quarter.

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