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~ p.1-,o:/1-t . 'f l.o.M ·r-:lccoW'nf R,~)lM>.. Management Aceo1111lilj
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· 1) · Gross Profit Ratio .
Gross profit ratio is the ratio which establishes the relati~nshir ~etween gt<>$~ Pro~t
~d. net sales. This is also known as gross profit to net sales ratio. This ratio 18 useful Parttcular1)
10
the case-of wholesale and retail trading firms. Its purpose is to show _the amount of gross Proijt
g~era~ed for each rupee of sales. Gross profit ratio is computed as follows:
. . .. '
. Gross
GrOSS Pr Ofit Ratio = .
Profit / ··
X 100
Net sales ..
The amo~t of gross profit is .the difference betvveen ·net sales .and the cost of goods sold
which includes direct expenses. . .
Interpretation:

A high margin enables all operating expenses to be covered and provides a reasonable return
to the shareholder hi order to keep the ratio high, management_has to minimize cost o~ goods sold
and improve .sa,es performance. . ., ·
i) -Operating Ratio ·...

Operating ratio establishes the relationship between operating cost and net sales. It may
be calculated as follows: .· · · -
. ·, . } . ': ... :·· '

.Ope . R . · Operating Cost ··

rating atiO :::; - . X 100
. · Net s~es ·
Operating Cost = Cost of Goods Sold + ·operating Expenses . ··
Cost·of goods sold = Sales·- Gross Profit
or
. . . '

· Cost of goods sold = Opening Stock+ Net Purchases + Direct Expenses - Closing Stock
Operating expenses = Administrative expenses + Selling & Distribution expens~s . .
i Interpretation: . ..
.· The operating ratio shows ·t~e overall operating effi,ciency of the business. High operating
ratio is undesirable as it leaves a: SD:1311 po~ion of iµcome to meet other non-operating expenses
• • , _; • , l , • I • ' •

· like interest on Joans. A low ratio is better and reflects the efficiency of the managefi\ellt. The
lower the ratio, the higher would be the profitability. .
3) Operating Profit Ratio · . •· 1- , ,
. . . .

.Operating 'profit ,ratio Studies the relationsNp between qperating p~ofit (i.e., EBIT Earnings
before Interest' and _Tax] ·and net sale~. The purpose of this ratio is to find out the amount of
operating profit for each rupee of sales. _'Dte formula for ~s ratio is as follows:
· . p fi Rati Operating Profit
Op.era.ting ro t o = - - - - - - x 100 -
. Net sales ·
 81
operating Profit === Gross P fi . ·
operating Profit ==Net s · ro t - Operating Expenses or
a1es - ope r
Operating·Profit ==Net ra ing cost
. . . . saIes -{Cost of .. . .
Selling and distribution expe · goods sold + Adniimstrattve and office expenses +
• . nses) •
Jnterpretahon: · .
A high ratio is an indicator of th . .
inefficiency of the firm. e operational efficiency and a low ratio stands for operational
4) Expenses Ratios ·
Expenses ratios indicate the relatio. hi . .
a) . · Expenses Ratio
Factory . · ns P of various expenses to net sales.
. .
This ratio studies the relationshi b
the manufacturing efficiency ,0 f th p e~e~n factory expenses and net sales. This ratio shows
. , . e organization. The formula for this ratio is as follows:
Factory Expenses Ratio= Factory Expenses
. ---=-...!__.__ X 100 .
Net sales ·
b) Administrative Expenses Ratio
·This ratio studies the relationship betw dmini' · d I Thi ·
· . .str . een a strattve .expenses an net sa es. s ratio
shows the admini ative efficiency of the·organization. The formula for computing this ratio is as
follows: .. ·

Administrative Expenses Ratio= Administrative Expenses x 100

. Net sales
c) Selling and 'Distribution Expenses Ratio
, , This ratio s~es the relationship·between selling ·and distribution expenses and µet sales.
This ratio shows the efficiency of sties of the organization. The formula·for computing'this ratio
is as follows:

. . 'b . Ex Ra . Selling & Distribution·Expenses ·

.Selling & Distri ution penses tio = . Net sales x 100

S) Net Profit Ratio

. . . '

The ratio is also called net profit to net s·ates ratio and-explains the relationship between net
profit after taxes and net sales. The following .formula .is ;used to calculate this ratio:
. _ Net Profit·After Tax x
Net Profit Ratio - . Net sales 100

Interpretation:
It is~ measure of overall profitability of the .firm. Th~ highe~ 'the ra!o,_the gr~ater would be
the returns to the shareholder's and vice versa. A net profit margm of 101/o 1s considered normal.
This ratio is very useful to control cost and to. increase the sales.
 82 Management Aeco
Utttt

6)
"~
Stoc.k Turnover Ratio
· This ratio establishes the relationship between·cost of goods sold and average value·of St~ ·
The ~urpose ~f this ratio is to show the number of times the Stock of a firm is rotated or ~\.
over 1.e. sold 1n a year. It gives an indication of the efficiency of Stock management. The fofnnl{
for this ratio is as under:

S+LOCk Tumover Ratio

. = - -- -Cost -Goods
- -of - - -Sold
----
Average Stock or Closing Stock
or
·. . Net Slaes
Stoek T umover Ratio=------- - - - - - - - -
Average.Stock or Closing Stock

·A verage Stoek-= ___;:~

Opening Stock
-___,;=---~ + Closing
· ____ ,;;._Stock
__
. .. . . 2 .

The two ~ersions stated ·above, the first one is more realistic as the two components of the
ratios are dependent on cost price. ·
Interpretation:
_A high stock turnover ratio is an index of efficient stock management .and a low ratio stand
for inefficient stock management. A low ratio also implies that_the _firm has excess stock in relatic
to production and sales.
n111~tr11tinn '.l_. Th~ foJJowing are the· sunuilarized P & L Account of Perfect Products Ltd., 1