Q.From the illustrative Statement of Profit and Loss in Section 1 (Revenue from Operations ₹20,00,000; Gross Profit ₹6,00,000; Net Profit after Tax ₹2,70,000), calculate the Gross Profit Ratio and the Net Profit Ratio.

Both ratios express a slice of the Statement of Profit and Loss as a percentage of sales, but they stop at very different points.

Step 1 - Gross Profit Ratio.

Gross Profit Ratio = (Gross Profit / Revenue from Operations) x 100 = (6,00,000 / 20,00,000) x 100 = 30%.

This means the firm retains 30 paise of every rupee of revenue after covering only the direct cost of goods sold, before operating expenses.

Step 2 - Net Profit Ratio.

Net Profit Ratio = (Net Profit after Tax / Revenue from Operations) x 100 = (2,70,000 / 20,00,000) x 100 = 13.5%.

This is the final margin - after all operating expenses, interest, and tax - so it is always smaller than the Gross Profit Ratio (here 13.5% versus 30%). …

Students sometimes use Net Profit BEFORE tax in the Net Profit Ratio when the question asks for the standard net-profit measure - unless a question specifies 'before tax', t …