Page 130 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 6: Financial Statements: Analysis and Interpretation

Notes

Notes 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.

Net Profit 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 profit 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.

Notes Standard Norm of the Ratio:
Higher the ratio, the better the position of the firm is, which means that the firm earns
greater profits out of the sales and vice-versa.
Operating Profit 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 profit.

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