Page 1 - Module - 4

Class-XII

Accountancy (Ratio analysis)

TS GREWAL (2020-EDITION)

CHAPTER-4

Topic – Ratio analysis(Module 11)

Key Points:

 Meaning of Profitability ratio:
o Profitability ratios are financial metrics used by analysts and investors to
measure and evaluate the ability of a company to generate income (profit)
relative to revenue.They show how well a company utilizes its assets to produce
profit and value to shareholders.

 Objective of Profitability ratio:
o The main objective of computing Gross Profit Ratio is to determine the efficiency of the
business. We can also compare this ratio with the ratio of earlier years or with that of
other firms to compare and to assess the efficiency of the business. Therefore, Higher
Gross Profit Ratio is better as it leaves a higher margin to meet operating expenses
andthe creation of reserves.

 Limitation of Profitability Ratio:

The ratios are dependent on several calculations made behind each value
reported on the financial statements. A material error or fraud in a line item will result
in a miscalculated ratio which would be hazardous for investors and company in the
future.

Types of Profitability Ratio:
1. Gross profit ratio;
2. Operating ratio;
3. Operating profit ratio;
4. Net Profit ratio;
5. Return on Investment Ratio.

Illustration(For Practice):
98 to 125.

Link: https://www.youtube.com/watch?v=nNZDqkxjz-E