Example 1

Suppose there are 2 Companies A and B

A earned profit of 10000 on a turnover of 100000

B earned a profit of 15000 on a turnover of 500000

 

Calculate Profit as a percentage of Sales of both Companies

-a-

Particulars

Company A

Company B

Profit

10000

15000

Sales

100000

500000

Profit/Sales

10%

3%

 

-ea-

Which Company is better?

-a-

If we consider profit, Company B is earns more profit

If we Consider Profit %, Company A is better

-ea-

Which is the ideal Profit/Sales ratio

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It depends upon business to business

Some business has higher profit margin while others have low margin

Example:- Retail Business have more margin than wholesale business

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  Example 2

Suppose a Company earned profit in 2 years as follows

Particulars

2016

2017

Profit

8000

9000

Sales

100000

150000

  Has the Company’s performance in 2017 improved?

-a-

Particulars

2016

2017

Profit

8000

9000

Sales

100000

150000

Profit/Sales

8%

6%

 

Company’s profit has marginally increased from 8000 to 9000

However, the Company’s Profit % has reduced form 8% to 6%

Hence, to earn a small increase in profit, Company had to make a large increase in sales

Hence, Company’s performance has not improved

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  1. Accounts and Finance
  2. Step 7 Ratio Analysis
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CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 6 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
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