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Profitability Ratios Video Lecture | Accountancy Class 12 - Commerce

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FAQs on Profitability Ratios Video Lecture - Accountancy Class 12 - Commerce

1. What are profitability ratios in commerce?
Ans. Profitability ratios in commerce are financial metrics used to measure a company's ability to generate profits relative to its expenses and other costs. These ratios provide insights into the company's profitability and financial health by analyzing its earnings, sales, and assets. Examples of profitability ratios include gross profit margin, net profit margin, return on assets, and return on equity.
2. How is gross profit margin calculated?
Ans. Gross profit margin is calculated by dividing the gross profit of a company by its net sales (revenue) and expressing it as a percentage. The formula for gross profit margin is: Gross Profit Margin = (Gross Profit / Net Sales) x 100 Gross profit is the difference between net sales and the cost of goods sold (COGS). This ratio indicates how efficiently a company generates revenue from its direct production or service costs.
3. What does return on assets (ROA) measure?
Ans. Return on assets (ROA) is a profitability ratio that measures how effectively a company utilizes its assets to generate profits. It is calculated by dividing the net income of a company by its average total assets and expressing it as a percentage. The formula for ROA is: ROA = (Net Income / Average Total Assets) x 100 ROA indicates the company's ability to generate profit from its investments in assets. It helps investors and analysts assess the company's efficiency and profitability in utilizing its resources.
4. How is net profit margin different from gross profit margin?
Ans. Net profit margin and gross profit margin are both profitability ratios, but they measure different aspects of a company's profitability. Gross profit margin measures the efficiency of a company's production or service costs in generating revenue and is calculated by dividing gross profit by net sales. On the other hand, net profit margin measures the overall profitability of a company by considering all expenses, including operating expenses, taxes, and interest. It is calculated by dividing the net income of a company by its net sales and expressing it as a percentage. Net profit margin provides a broader picture of a company's profitability after considering all costs and expenses.
5. What is the significance of return on equity (ROE) in assessing profitability?
Ans. Return on equity (ROE) is a profitability ratio that measures the return generated by a company's shareholders' equity. It is calculated by dividing the net income of a company by its average shareholders' equity and expressing it as a percentage. The formula for ROE is: ROE = (Net Income / Average Shareholders' Equity) x 100 ROE indicates how effectively a company generates profits using the money invested by its shareholders. It helps investors and analysts assess the company's profitability and the returns it generates for its shareholders. A higher ROE is generally considered favorable, as it implies better profitability and efficient use of shareholders' equity.
41 videos|106 docs|56 tests
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