Every financial ratio has a unique profit formula, we will discuss the most important ones below.
Net profit margin
The profitability ratio that divides a company’s net income by total revenue is known as net profit margin. It shows how lucrative a company is after all expenses, such as interest and taxes, have been deducted.
The net profit margin takes everything into consideration. The main disadvantage of this ratio is that it contains a lot of clutter” such as one-time expenses and gains, making it difficult to compare a company’s performance to that of its competitors.
Net profit margin = Net profit / Revenue x 100
Gross profit margin
The Gross Profit Margin compares a company’s gross profit to its sales revenue. This margin shows how much money a company makes after all of the costs of producing goods and services have been deducted.
A larger Gross Profit Margin ratio implies that the corporation is very efficient in running its business, resulting in a higher gross profit.
Gross Profit Margin = Gross Profit/Revenue
Operating profit margin
The operating profit is the revenue of a business minus its day-to-day operating expenses. Because this computation excludes any outstanding interest or taxes, a simple approach to explain this is to add these parts back onto the net profit amount. After that, you calculate the operating profit margin.
This ratio, unlike the net profit margin, focuses on the business’s fundamental costs because interest and tax charges are less essential to day-to-day operations. It’s often referred to as EBIT because the two measurements are so similar, but there are several key differences to be aware of.
Operating profit margin = (Net profit + Interest + Tax) / Revenue x 100
Return on equity
Return on equity is an important metric for corporate shareholders and investors. It calculates the return on investment made by investors in the company. This figure is essential to look at when searching for new investors.
Return on equity = (Net profit / Shareholder equity) x 100
Return on assets
This ratio shows how well your company converts its capital into profits. To put it another way, ROA assesses how well your organisation makes use of the assets at its disposal to boost its profits.
A high return on investment (ROI) may imply that your organisation can generate income efficiently using its current assets.
Return on assets = (Net profit / Total assets) x 100
Return on capital employed
This profitability ratio depicts the company’s return on the capital invested by the owners in the company.
A high return on capital employed ratio is a better representation of the company because it shows that more profits are earned per rupee of capital employed.
Return on capital employed ratio = (Operating profit / Capital employed) x100
Net cash flow
The net cash flow ratio shows what percentage of the time the company is in a cash deficit or surplus. A negative result implies that the company may need to seek outside funding, whereas a high surplus percentage indicates that it is unlikely to run out of funds.
Net cash flow margin = (Cash inflows – Cash outflows) / (Larger of cash inflow OR outflow figure) x 100
Even if you’re not searching for investors at this point in your firm, keeping track of financial statistics might be beneficial.
It’s good to start with a limited collection of reports, then add more as your company expands, perhaps obtaining more insight to help you better your company in the future. To assist you with managing these computations, you can hire a specialist or use an automated software system.[/ohio_text]