Question

What does an increase or decrease in each of these proftiability ratios mean?

GP Margin, Income before taxes to Owner's Equity, Income before taxes to Total assets, Sales to Long Term assets, Sales to total Assets, and Sales to Working Capital

Answer 1

GP margin stands for gross profit margin ratio. This ratio can be expresses the relationship of gross profit with net sales revenue. This ratio can be derived by dividing gross profit with net sales revenue. This is one of the important profitability ratio and expressed in percentage form. Gross profit margin ratio is higher the better. Increase in GP ratio means the company is earning more gross profit vice versa.

Income before taxes to the owner's equity expresses the relationship of profit before tax with the owner's equity. The increase of this ratio means more income is generating by utilisting the owner's investment and the decrease of this ratio means owner's investment is generating less income before taxes.

Income before taxes to total asset expresses the relationship between income before tax with the total asset. It shows the efficiency with which the asset is generating to contribute the income. This ratio is higher the better. Increase in this ratio means the asset is more efficient in generating income while decrease of this ratio means the asset is generating less income before taxes.

Sales to long term asset is one of the activity ratio which measure the performance of long-term asset. It shows efficiency with which long-term asset is utilising in generating sales revenue. This ratio higher the better. All the Activity ratio Expressed in times. Increase in this ratio means the long term asset is efficiently used in generating sales revenue while decrease in this ratio means the long term asset decreases its efficiency.

Sales to total asset is also one of the activity ratio which shows that how much the company is generating sales revenue with the investment in total asset. this ratio is also higher the better. Increase in sales to total asset ratio means the company is generating more sales revenue by utilising its total assets and decrease in this ratio means total asset is generating less revenue.

Sales to working capital is again one of the activity ratio which expresses the relationship of working capital in terms of sales. It shows with each dollars invested in working capital how much dollar sales generating. Increase in this ratio means working capital is more effectively used to generate sales revenue or less working capital required for more revenue while decrease in this ratio means working capital is less efficient in generating sales revenue or more working capital is required generating same sales revenue.