Net Profitability Ratios: The Profability Of A Business

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PROFITABILITY RATIOS

The profitability of a business with respect to its sales or investments can be described through the financial ratios that are known as profitability ratios. They are called profitability ratios because they measure the efficiency of operations of a firm with the help of its profits. They help the management and owners to take corrective steps because the profitability ratios are useful tools that help to understand the efficiencies / inefficiencies of a business.

The communication about the final goal of a business is done by the profitability ratios. The final goal is of profits for all the profit-oriented businesses. A business is unlikely to remain a going concern without profits. Just as important as profits are, the profitability ratios are equally important because they deal with profits.

In order to measure the operating efficiency of a business and the returns generated by the business, the profitability ratios are calculated. The interest in profitability ratios can be for different reasons by different stakeholders. Owners, management, creditors, and lenders are some of the prominent stakeholders of a business.

Net Profit Margin Ratio

A profitability ratio that is calculated as net profit divided by net sales is called net profit margin ratio. The amount of every rupee of …show more content…

Current ratios indicate the relation between current assets and current liabilities. Current liabilities represent the immediate financial obligations of the company. Current assets are the sources of repayment of current liabilities. Therefore, the ratio measures the capacity of the company to meet financial obligations as and when they arise. Acceptable current ratio values vary from industry to industry. Generally, a current ratio of 2:1 is considered to be acceptable. The higher the current ratio is, the more capable the company is to pay its

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