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4. Profitability Ratios: Profitability ratios measure the profitability of a concern generally. They are calculated either in relation to sales or in relation to investment.
ü Return on Capital Employed or Return on Investment (ROI): This ratio reveals the earning capacity of the capital employed in the business.
=PBIT /Capital Employed
ü Return on Proprietors Fund / Earning Ratio: Earn on Net Worth
=Net Profit (After tax)/Proprietors Fund
ü Return on Ordinary shareholders Equity or Return on Equity Capital: It expresses the return earned by the equity shareholders on their investment.
=Net Profit after tax and Dividend / Proprietors fund or Paid up equity Capital
ü Price Earning Ratio: It expresses the relationship between marketprice of share on a company and the earnings per share of that company.
=MPS (Market Price per Share) / EPS
ü Earning Price Ratio/ Earning Yield:
= EPS / MPS
ü EPS= Net Profit (After tax and Interest) / No. Of Outstanding Shares.
ü Dividend Yield ratio: It expresses the relationship between dividend earned per share to earnings per share.
= Dividend per share (DPS) / Market value per share
ü Dividend pay-out ratio: It is the ratio of dividend per share to earning per share.
= DPS / EPS
DPS: It is the amount of the dividend payable to the holder of one equity share. =Dividend paid to ordinary shareholders / No. of ordinary shares
G.P= Sales – C.G.S
G.P.Ratio =G.P/Net sales*100
Net Sales= Gross Sales – Return inward- Cash discount allowed
Net profit ratio=Net Profit/ Net Sales*100
Operating Profit ratio=O.P/Net Sales*100
Interest Coverage Ratio= Net Profit (Before Tax & Interest) / Fixed Interest Classes
Return on Investment (ROI): It reveals the earning capacity of the capital employed in the business. It is calculated as,
The return on capital employed should be more than the cost of capital employed.
Capital employed =Equity Capital + Preference sharecapital + Reserves + Longterm loans and Debentures - Fictitious Assets – Non Operating Assets