Profitability Ratios Definition

Introduction to profitability ratios definition:

Profitability ratio is one of the important topic in business mathematics. The definition of profitability ratio is given as the ratio used for measuring the company's profit. Mainly the profitability ratio is used for the fundamental analysis. There are three types of profitability ratios are used. By using these ratios we can find the company's income. In this article, we are going to see about the detailed description of the definition of the profitability ratios.

Explanation to Profitability Ratios Definition

The explanation for the profitability ratios definition are given below the following section,

Three types:

Gross profit margin:

Formula:

'((G.F)/(S.R))xx100'

where,

G.F = Gross Profit

S.R = Sales Revenue

Net profit margin:

Formula:

'((N.F)/(S.R))xx100'

where,

N.F = Net Profit

S.R = Sales Revenue

Return on Capital Employed (R.O.C.E):

Formula:

'((N.F)/(C.E))xx100'

where,

N.F = Net Profit

C.E = Capital Employed

Example Problems to Profitability Ratios Definition

Gross profit margin:

Problem 1: Gross profit = 210, Sales Revenue = 300. Find Gross Profit margin.

Solution:

Step 1: Given:

Gross profit = 210

Sales Revenue = 300.

Step 2: Formula:

'((G.F)/(S.R))xx100'

Step 3: Find:

'(210/300)xx100'

= '210/3'

= 70

Result: Gross profit margin = 70

Net profit margin:

Problem 1: Net profit = 100, Sales Revenue = 200. Find Net Profit margin.

Solution:

Step 1: Given:

Net profit = 100

Sales Revenue = 200.

Step 2: Formula:

'((N.F)/(S.R))xx100'

Step 3: Find:

'(100/200)xx100'

= '100/2'

= 50

Result: Net profit margin = 50

Return on Capital Employed (R.O.C.E):

Problem 3: Net profit = 100, Capital employed = 350. Find R.O.C.E

Solution:

Step 1: Given:

Net profit = 100

Sales Revenue = 350

Step 2: Formula:

'((N.F)/(C.E))xx100'

Step 3: Find:

'(100/35)xx100'

= '1000/35'

= 28.57

Result: R.O.C.E = 28.57

Practice Problems to Profitability Ratios Definition

Problem 1: Gross profit = 450, Sales Revenue = 600. Find Gross Profit margin.

Answer: 75

Problem 2: Net profit = 250, Sales Revenue = 300. Find Net Profit margin.

Answer: 83.33

On this page, we hope to clear up problems that you might have with fractions and their uses in Algebra. Ratios are continually being utilized in math and make many things much easier to do. Scroll down or use the links below to start understanding ratios better!

Solving proportions

Advanced ratio problems (inferring)

Quiz on Ratios

Proportions

In this section we'll help you understand how to deal with ratios.

A fraction is also known as a ratio. For example, 3/4 is also the ratio of 3 to 4. Any statement (or equation) that says two ratios are equal is called a proportion. An important thing to remember when dealing with equal ratios is illustrated below.

3 15 4 * 15

- = -- Cross multiply.

4 20 3 * 20

4 * 15 = 3 * 20

60 = 60

You can solve for unknowns in proportions by using that process.

Example

4 21

1. Solve: - = --

m 5

Solution: Set the cross products equal.

4 * 5 = 21m

Finish the problem by dividing both sides

by 21.

20

-- = m

21

by: johnharmer

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