So form the above calculation, gross profit will be: = Net profit + Interest expense + Tax + Depreciation expense. Also known as Solvency Ratios, and as the name indicates, it focuses on a company’s current assets and liabilities to assess if it can pay the short-term debts. CAs, experts and businesses can get GST ready with ClearTax GST software & certification course. Here we discuss the formula to calculate Profitability Ratios (Gross Margin, Net Margin, EBITDA Margin) using practical examples and a downloadable excel template. The main profitability ratios (gross profit margin, operating profit margin and ROCE) are explained in this revision presentation. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing. It indicates the efficiency or effectiveness with which the operations of the business are carried on. Net worth = Equity share capital, and Reserve and Surplus. Net Profit Margin. Debt ratios measure the firm's ability to repay long-term debt. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Hence, profit is high, the rate of dividend is also high. Top 5 Financial Ratios . A high ratio represents better the company is. 1) Return on Equity = Profit After tax / Net worth, 2) Earnings Per share = Net Profit / Total no of shares outstanding, 3) Return on Capital Employed = Net Operating Profit / Capital Employed * 100, 4) Return on Assets = Net Profit / Total Assets, 5) Gross Profit = Gross Profit / sales * 100, 6) Net Profit = Net Profit / Sales*100. Gross Profit Margin: Gross Profit Margin is calculated using the formula given below. Profitability ratios are used by investors and creditors to determine a company’s return on investment based on the resources available to the business. Profitability Ratios There are three main ratios that can be used to measure the profitability of a business: The gross profit margin. This ratio measures the marginal profit of the company. Formula for net profit ratio is Financial statement analysis is a judgmental process. This ratio represents the final result of the company. Profitability ratios focus on a company’s return on investment in inventory and other assets. Calculation of Gross Profit Margin = (170000 - 8000) / 170000 * 100% CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. The high ratio represents that the company is having surplus cash. Formulas for profitability ratio's. The followings are the overall profitability ratios. This ratio also indicates Expectation about the earning of the company and payback period to the investors. To help identify the short term liquidity of a firm, this ratio is used. It has mainly two types of ratio under this. Three major ratios in this list are gross profit margin, net profit margin, and EBITDA margin, which we will be covered here. This ratio is a measure of the overall profitability net profit is arrived at after taking into account both the operating and non-operating items of incomes and expenses. But, in actual practice, this is not happened. Net income equals total revenues minus total expenses and is usually the last number reported on the income statement. The formulas you are about to learn can be used to judge a company’s performance and to compare its performance against other similarly-situated companies. Significance of Profitability Ratios: Profitability is a measure of efficiency and control. This ratio is used by the investor to check the undervalued and overvalued share price of the company. A high ratio represents the greater profit margin and it’s good for the company. 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