Profitability ratios

Profitability ratios show how well the firm earns.

Margins (on revenue from operations):

• Gross profit ratio = gross profit ÷ revenue × 100.
• Operating ratio = (cost of revenue + operating expenses) ÷ revenue × 100. Lower is better.
• Operating profit ratio = 100 − operating ratio.
• Net profit ratio = profit after tax ÷ revenue × 100.

Returns:

• Return on investment (ROI) = profit before interest and tax ÷ capital employed × 100.
• Return on shareholders' funds = profit after tax ÷ shareholders' funds × 100.

Per share:

• Earnings per share (EPS) = (profit after tax − preference dividend) ÷ number of equity shares.
• Book value per share = (shareholders' funds − preference capital) ÷ number of equity shares.
• Dividend payout ratio = dividend per share ÷ EPS.
• Price-earnings (P/E) ratio = market price per share ÷ EPS.

Example: profit after tax 2,00,000; preference dividend 20,000; 60,000 equity shares; market price 45. EPS = 1,80,000 ÷ 60,000 = 3; P/E = 45 ÷ 3 = 15.

Read the ratios together: a rising gross profit ratio with a falling net profit ratio means expenses are eating the margin.