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ratios
Harsh Sanghvi K041
Nikhil Abichandani M001
Profit margin
There are two types of profit margins:1. Gross profit margin.
2. Net profit margin.
. Gross profit margin
. Gross profit margin measures the percentage of each sales rupee
remaining after the firm has paid for its goods.
(Gross profit Net sales)*100
. Net profit margin
Net profit margin measure the percentage of each sales rupee
remaining after all costs and expenses including interests and
taxes have deducted.
(Earnings after interests and taxes net sales)*100
Return on Capital
Employed
This ratio measures the relationship between net profit
and capital employed. It indicates how efficiently the
long term funds of owner and creditors are being used.
The return on capital employed ratio shows how much
profit each Rupee of employed capital generates.
A higher ratio would be more favorable because it means
that more Rupees of profits are generated by each dollar
of capital employed.
ROCE= (Earnings before interests and taxes average
capital employed)*100
Capital employed denotes the shareholders funds.
Return on total
Shareholders equity.
Measure the return on both preference and equity
shareholders in the firm.
Return on equity measures how efficiently a firm can
use the money from shareholders to generate profits and
grow the company.
ROE is a profitability ratio from the investor's point of
viewnot the company
(Net profit after taxes total shareholders equity)*100
Total shareholders equity includes preference share capital
plus equity share capital plus reserve and surplus less
accumulated losses and fictitious assets.
Du Pont Equation
The profit margin times the total assets turnover is called the Du
Pont equation, and it gives the rate of return on assets (ROA): ROA
= Profit margin Total assets turnover.
(Net Income/Revenue) * (Revenue/Assets) = Profit Margin * Asset
Turnover
Solution:
Gross Profit Margin= Gross Profit/ Net sales
(21750/49000)*100= 44.38%
Net profit Margin= Net profit/ Net sales
(6300/49000)*100= 12.85%
Return on investment = EBIT/Total Assests
(6300+6300+400/35050)= 0.370
ROCE= EBIT/ Capital Employed (TL-CL)
13000/(35050-1250-5000) = 0.451