What is the profit ratio?

also known as profit margins, profit ratio is simply net profits that remain after calculating and resolving taxes, divided by selling or income created in the same period. The idea of ​​this type of ratio or margin is to find out the percentage of income that is actually stored as income when all related expenses were charged and paid in full. The company usually calculates the profit ratio for the period of the 12 -month period, although in some industries it is common for this type of calculation to occur quarterly and annually.

In order to initiate the process of determining the profit ratio, it is first necessary to reach a net profit, which serves as the basis for the calculation. Basically, net profit is simply what has been left after all relevant expenses have been deducted from gross profits generated for the considered period. What represents a net profit is somewhat different from one country to another, with some bustiness focused on actual expenditure on the production and omitting of administrative expenditure. In other scenarios, all expenses related to business are deducted from gross profits. Taxes are also deducted with both approaches, leaving an amount that is often referred to as net profit of taxes .

Once net profit is set, this number is divided by sale generated in the same period. In some situations, businesses prefer to take income rather than actual sale, because some of the sales during this period may not be collected at this time. The resulting value is usually displayed as a percentage. A higher percentage means that the company maintains more generated net profit, while the lower percentage confirms that the company does not maintain a large number of net profits that have been implemented in the period of disadvantage.

What represents an acceptable level of profit ratio will vary from one setting to another. E.gFor example, a 20% ratio can be considered adequate in one industry, but in another other industry. Although the ratio of profit is considered favorable, it is not unusual for business owners and key members of the control team to analyze the costs associated with the manufacturing process and is looking for ways to reduce these costs and increase the amount of net profit realized in the coming period. Assuming that this can be achieved without having a negative impact on revenue or income generated during this time, the implementation of any new cost reduction strategies will probably lead to an improvement in profit ratio.