Ratio Analysis: Cons And Advantages Of Ratio Analysis

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Gross profit Gross profit ratio= ----------------- X 100 sales
15. Net Profit Margin

Net profit is obtained when operating expenses; interest and taxes are subtracted from the gross profit. Net profit margin ratio is measured by dividing profit after tax by sales:

Net Profit Net Profit Ratio = --------------- X 100 Sales

Net profit ratio establishes a relationship between net profit and sales and indicates and management’s in manufacturing, administrating and selling the products. This ratio is the overall measure of the firm’s ability to turn each rupee sales into net profit. If the net margin is inadequate, the firm will fail to achieve satisfactory return on shareholders’ funds.

Net Margin Based on NOPAT
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 Ratio analysis provides data for inter firm comparison
 Ratio analysis helps in planning forecasting trends in cost, sales, profit and other related facts that are revealed by the past ratios and future events can be forecast on the basis of such trends.
 Ratios may be used as an instrument of management control particularly in the area of sales cost.
 A ratio helps in investment decision to make profitable investment.
 Ratios also facilitate the function of communication. It can be easily conveyed through the ratio as what as happened during the two intervening periods.
 Ratios may also be used as a measure of efficiency.

LIMITATIONS OF RATIO ANALYSIS

 Over use of ratios as controls on management could be dangerous, that management only concentrates on improving ratio rather than dealing with the significant issues.
 The standards will differ from organization to organization. Comparison of ratios of firms belonging to different industries is not

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