The profitability ratios based on sales analysis reveal the relation of different individual items with sales f an enterprise. The object is to ensure that the firm should earn adequate profit on each rupees of sales. The following rations indicate the profitability of a firm.

(a)    Gross Profit Ratio

The Gross Profit Ratio measures the relationship between Gross Profit and Sales.

G.P.Ratio = Gross Profit / Net Sales x 100

G.P.Ratio = Net Sales-Cost of Goods Sold / Net Sales x 100

Illustration:

Net Sales = Rs 21,00,000
Gross Profit = Rs 7,00,00

G.P.Ratio = 21,00,000 / 7,00,000 x 100.

Causes fo Increase in Gross Profit Ratio. The increase in Gross Profit Ratio may be due to  any one or more of the following factors:

(i)    Increase in selling price without proportionate increase in cost of sales.
(ii)    Decrease in cost of goods sold without proportionate decrease in the selling price.
(iii)    Devaluation of opening stock (abnormal losses, etc.).
(iv)    Over-valuation of closing stock (change in method of valuation).

Causes of Decrease in Gross Profit Ratio. The decrease in Gross Profit Ratio may be due to any one or more of the following factors:

(i)    Decrease in selling price without proportionate decrease in cost of sales.
(ii)    Increase in cost of goods sold without proportionate increase in the selling price.
(iii)    Over-valuation of opening stock.
(iv)    Under-valuation of closing stock (change in method of valuation)
(v)    Increase in consumption of input (increase in wastages, etc.)
(vi)    Increase in pilferage, theft, etc.

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