*
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
*

Particulars |
Company A |
Company B |

Profit |
10000 |
15000 |

Sales |
100000 |
500000 |

Profit/Sales |
10% |
3% |

*
Which Company is better?
*

If we consider profit, Company B is earns more profit

If we Consider Profit %, Company A is better

*
Which is the ideal Profit/Sales ratio
*

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

*
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?
*

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

Solve all your doubts with Teachoo Black (new monthly pack available now!)