Explain any one ratio of profitability.

1.	Explain any one ratio of profitability.
Answer» Profit earning capacity of the business is known as profitability. Profitability ratios are as under: Gross profit ratio Operating ratio Operating profit ratio Net profit ratio. Explanation of Gross profit ratio: Gross profit ratio shows the relationship between gross profit and total net sales. Gross profit ratio is an income-based ratio. Gross profit ratio indicates percentage of gross profit to sales. Sales means revenue from operation. Operating income means the income which is generated from the business in which company deals. Sales means net sales. Formula : Gross profit ratio = Gross profit / Net Sales ×100 Where, Gross profit = Total Sales – Cost of goods sold Total sales = Credit sales + Cash sales Net sales = Sales – Sales return Cost of goods sold = Opening stock of raw material + purchase of raw material + purchase expenses + wages+ factory expenses – closing stock of raw material

Answer»

Profit earning capacity of the business is known as profitability.

Profitability ratios are as under:

Gross profit ratio
Operating ratio
Operating profit ratio
Net profit ratio.

Explanation of Gross profit ratio: Gross profit ratio shows the relationship between gross profit and total net sales. Gross profit ratio is an income-based ratio. Gross profit ratio indicates percentage of gross profit to sales. Sales means revenue from operation.
Operating income means the income which is generated from the business in which company deals.
Sales means net sales.

Formula : Gross profit ratio = Gross profit / Net Sales ×100
Where, Gross profit = Total Sales – Cost of goods sold
Total sales = Credit sales + Cash sales
Net sales = Sales – Sales return
Cost of goods sold = Opening stock of raw material + purchase of raw material + purchase expenses + wages+ factory expenses – closing stock of raw material

Explain any one ratio of profitability.

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