Profitability Ratios and Activity (Turnover) Ratio

Profitability Ratios — efficiency in earning profit

Gross Profit Ratio = (Gross Profit ÷ Net Sales) × 100

Measures the margin left after covering only the direct Cost of Goods Sold — a broad indicator of trading (buying/manufacturing/selling) efficiency and pricing policy.

Net Profit Ratio = (Net Profit ÷ Net Sales) × 100

Measures the OVERALL margin left after covering every operating AND non-operating expense — the single most complete measure of how much of every rupee of sales the firm actually keeps as profit.

Operating Ratio = [(Cost of Goods Sold + Operating Expenses) ÷ Net Sales] × 100

Measures the proportion of Net Sales absorbed by the firm's normal operating cost. Its complement is the Operating Profit Ratio = 100 − Operating Ratio — the margin earned from normal trading operations alone, before any non-operating income or expense is brought in. A LOWER Operating Ratio (and correspondingly a HIGHER Operating Profit Ratio) indicates better operating efficiency.

Return on Investment (ROI) = (Net Profit before Interest and Tax ÷ Capital Employed) × 100, where Capital Employed = Shareholders' Fund + Long-term Debt

ROI measures the overall return earned on the TOTAL long-term capital invested in the business, regardless of whether that capital came from owners or from long-term lenders — which is exactly why the numerator is Net Profit BEFORE interest (interest being the lenders' own share of the return) and before tax.

Activity (Turnover) Ratio — efficiency in using assets

Stock Turnover Ratio = Cost of Goods Sold ÷ Average Stock, where Average Stock = (Opening Stock + Closing Stock) ÷ 2

This measures how many TIMES, on average, stock is sold and replaced during the accounting period. A higher Stock Turnover Ratio generally indicates efficient stock management and fast-moving goods; a very low ratio can signal overstocking or slow-moving/obsolete stock tying up working capital unnecessarily.