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Profitability Ratios

Gross Profit Ratio

Gross profit Ratio = Gross profit / Net Sales

Gross Profit implies net sales less cost of goods sold.

This ratio shows the margin left after meeting manufacturing costs and measures the production efficiency.

 

Net Profit Ratio

Net profit Margin Ratio = Net Profit / Net Sales

This ratio shows the profits lest for share holders as a percentage of net sales. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management.

 

Net Income to Total Assets Ratio

Net Income to Total Assets Ratio = Net Income (Profit) / Total Assets

This measures how efficiency capital is employed.

 

Valuation Ratio

Valuation Ratio indicates hoe the equity stock of the company is assessed in the capital market. Market value of equity reflects the influence of risk and return.

 

Price Earnings (P/E) Ratio

Price Earning Ratio = Market price per share / Earning per share

Market price per share may the price prevailing on a certain day or the average price over a period of time.

Earning per share is profit after tax divided by the number of outstanding equity shares.

The P/E Ratio reflects the growth prospects, corporate image, risks involved and degree of liquidity of a firm.

 

Yield

Dividend / Initial price + Price Change / Initial price

(Dividend Yield) (Capital gains or Losses yield)

Companies with low growth prospects offer a high dividend yield and a low capital gains yield. Companies with high growth prospects offer a low dividend yield and a high capital gains yield.

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