Ratio Formula

Pages: 2 (394 words) Published: October 13, 2010
Ratio Formula Sheet
Profitability Ratios
(1) Return on Capital Employed = Profit before interest or operating profit x 100
Total non-current liabilities + Total Equity

(2) Return on Equity = Profit for Shareholder
Total Shareholder Equity

(3) Gross Profit Ratio = Gross profit
x 100
Net sales (Turnover or Revenue) Example:
Total sales = \$520,000; Sales returns = \$ 20,000; Cost of goods sold \$400,000 Required: Calculate gross profit ratio.
Calculation:
Gross profit = [(520,000 – 20,000) – 400,000]
= 100,000
Gross Profit Ratio = (100,000 / 500,000) × 100
= 20%
Causes / reasons of increase or decrease in gross profit ratio: It should be observed that an increase in the GP ratio may be due to the following factors. 1. Increase in the selling price of goods sold without any corresponding increase in the cost of goods sold. 2. Decrease in cost of goods sold without corresponding decrease in selling price. 3. Omission of purchase invoices from accounts.

4. Under valuation of opening stock or overvaluation of closing stock. On the other hand, the decrease in the gross profit ratio may be due to the following factors. 1. Decrease in the selling price of goods, without corresponding decrease in the cost of goods sold. 2. Increase in the cost of goods sold without any increase in selling price. 3. Unfavorable purchasing or markup policies.

4. Inability of management to improve sales volume, or omission of sales. 5. Over valuation of opening stock or under valuation of closing stock (4) Net Profit Ratio = (Net profit / Net sales) × 100

Example:
Total sales = \$520,000; Sales returns = \$ 20,000;  Net profit \$40,000 Calculation:
Net sales = (520,000 – 20,000) = 500,000
Net Profit Ratio = [(40,000 / 500,000) × 100]
= 8%
Significance: NP ratio is used to measure the overall profitability and...