Net Tax profit Ratio is a type of Profitability Ratio that determines the relative relation between Net Profit and Net Sales. It indicates the Net Profit in Net Sales.
$$Net\quad Profit\quad Ratio=\frac { Net\quad Profit }{ Net\quad Sales } $$
Where,
$$Net\quad Profit\quad Ratio=\frac { Net\quad Profit }{ Net\quad Sales } $$
Where,
- Net Profit = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation /Amortization + Interest Expenses + Tax paid)
- And Net Sales is the Total Revenue from Sales.
- Net Profit Ratio multiplied by 100 provides the Net Profit Margin in percentage terms.
Significance and Interpretation
- Net Profit Margin of a Company is the narrowest measure of profit as compared to Gross Profit Ratio, Operating Profit Ratio, and Predix Profit Ratio. Net Profit Margin considers all necessary expenses incurred by the company including Depreciation, Amortization, Interest Expenses, and Taxes.
- Net Profit Margin of a company is always less than Gross Profit Ratio, Operating Profit Ratio, and Pretax Profit Ratio due to the addition of the tax element.
- Gross Profit Ratio > Operating Profit Ratio > Pretax Profit Ratio > Net Profit Ratio
Examples
Example 1:
Given below are few details of M/S XYZ Ltd., use them an calculate the Net Profit Ratio for M/S XYZ Ltd.| Particulars | Amount (in Rs.) |
|---|---|
| Revenue from Sales (Cash) | 250000.00 |
| Revenue from Sales (Credit) | 25000.00 |
| Cost of Labour | 45000.00 |
| Material Cost | 45000.00 |
| Salary Expense | 90000.00 |
| Rent of Premises | 40000.00 |
| Insurance Expenses | 15000.00 |
| Depreciation | 15000.00 |
| Interest Expenses | 5000.00 |
| Taxes Paid @30% on PBT | 6000.00 |
Solution:
Cost of Goods Sold = Cost of Labour + Material Cost
⇨ Rs. 90000
Operating Expenses = Salary Expense + Rent of Premises + Insurance Expenses
Operating Expenses = Salary Expense + Rent of Premises + Insurance Expenses
⇨ Rs. 145000
Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales
Net Sales Revenue = Cash Revenue from Sales + Credit Revenue from Sales
⇨ Rs. 275000
PBT or Profit Before Tax = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation/Amortization + Interest Expense)
⇨ 275000 - (90000 + 145000 + 15000 + 5000)
PBT or Profit Before Tax = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation/Amortization + Interest Expense)
⇨ 275000 - (90000 + 145000 + 15000 + 5000)
⇨ Rs. 20000.00
Net Profit = PBT – Tax
Net Profit = PBT – Tax
⇨ 20000 – 6000
⇨ Rs. 14000
Net Profit Ratio = Net Profit / Net Sales
Net Profit Ratio = Net Profit / Net Sales
⇨ 14000 / 275000
⇨ 14 / 275
Hence, Net Profit Ratio = 14 /275 or 0.0509 or 5.09%
Hence, Net Profit Ratio = 14 /275 or 0.0509 or 5.09%
