15.CHAPTER 4 RATIO ANALYSIS: PROFITABILITY RATIOS : OPERATING RATIO & NET PROFIT RATIO

LEARNING OUTCOMES:

INTRODUCTION

MEANING AND SIGNIFICANCE OF THE PROFITABILITY RATIOS

TYPES OF THE PROFITABILITY RATIOS:

1.OPERATING  RATO

2.GROSS PROFIT RATIO
FORMULA OF THE RATIOS

THE APPLICATION OF THE RATIOS
ITEMS OF THE NUMERATOR AND DENOMINATOR OF THE RATIO

1. Operating ratio

It is computed to analyse cost of operations (for operating costs) in relation to revenue from operations.

Operating costs = cost of revenue from operations + operating expenses

* operating ratio = cost of revenue from operations + operating expenses divided by net revenue from operations × 100

* where,
 operating expenses = office expenses + administrative expenses +selling expenses + distributive expenses + depreciation + amortization expenses + employee benefit expenses

Significance.. Lower operating ratio is a very healthy sign because it would mean higher operating profit ratio. this is because 

Operating ratio = 100 - Operating profit ratio.

Ques 1  (EXAMPLE)

From the following information, calculate gross profit ratio and operating ratio:
revenue from operations                     340000
cost of revenue from operations         120000
selling expenses                                    80000

administrative expenses                       40,000



Ans.

operating ratio

gross profit = revenue from operations minus cost of revenue from operations

= 340000 - 120000 = 220000

gross profit ratio = gross profit / revenue from operations x 100
 = 220000 /340000 x 100 
= 64.71%
operating cost = cost of revenue from operations + selling expenses + administrative expenses
= 120000 + 80000 + 40000
 = 240000
operating ratio = operating cost / revenue from operations x 100 
= 240000 / 340000 x 100 
= 70.59%

2. Net profit ratio

Net profit ratio is based on all inclusive concept of profit. 
It relates revenue from operations to net profit after operating as well as non operating expenses and incomes.

 It is calculated as

Net profit ratio = net profit divided by revenue from operations × 100

Net profit = gross profit - operating and non-operating expenses + operating and non-operating incomes

Significance

Net profit ratio is a measure of net profit margin in relation to revenue from operations.
 It reflects the overall efficiency of the business, assumes great significance from the point of view of investors.

Ques 1 (EXAMPLE)


Following is the comparative statement of profit and loss of Lalit plastics limited for the years ended 31st march, 2019 and 2020

particulars                                    2018-19    2019-20  absolute change  % change
Revenue from operations           1200000    1600000       400000             33.33%
Less Employee benefit expenses 300000       400000       100000            33.33%
Profit before tax                           900000     1200000       300000            33.33%
less tax @ 40%                            360000        480000       120000           33.33%
profit after tax                              540000        720000      180000            33.33% 

Calculate net profit ratio for the year ending 31st march 2019 and 2020.

Ans.

Net profit ratio 

Net profit ratio = Net profit/ Revenue from operations x 100

For the year ended 31st march 2019

Net profit ratio= net profit before tax/ revenue from operations x 100
 or
 Net profit ratio = net profit after tax/ revenue from operations x 100

= 900000/1200000= 75% 
or
 =540000/1200000 =45%

For the year ended 31st march 2020

Net profit ratio= 1200000/ 1600000 x I00 = 75% 
or
 720000 /16 lakh x 100= 45%