Pretax Profit Ratio

Pretax Profit Ratio is a kind of Profitability Ratio that determines the relative relation between Pretax profit and Revenue from Operations. It indicates the Pretax Profit in Net Sales.
Pretax Profit Ratio = Profit Before Taxes (PBT) / Net Sales
  • Where, PBT or Profit Before Tax = Net Sales – (Cost of Goods Sold + Operating Expenses + Depreciation/Amortization + Interest Expense)
  • And Net Sales is the Total Revenue from Sales.
  • Pretax Profit Ratio multiplied by 100 provides the Pretax Profit Margin in percentage terms.

Significance and Interpretation

  • Pretax Profit Margin of a Company is a narrower measure of profit as compared to Gross Profit Ratio and Operating profit Ratio. Pretax Profit Margin considers all necessary expenses incurred by company including the Depreciation, Amortization, and Interest Expenses
  • Pretax Profit Margin of a company is always less than the Gross profit Margin and Operating profit Ratio due to the addition of extra cost elements. However, an increase in Gross Profit Ratio and/or Operating Profit Ratio may or may not have a similar impact on the Pretax Profit Margin.
    • If the increase in Pretax Profit Margin > Increase in Gross Profit Margin: This implies that the company is not having much Interest Payment and the effect of Depreciation is also less.
    • If the increase in Pretax Profit Margin < Increase in Gross Profit Margin: This implies that the company has a significant interest payable and/or the Depreciation is having a considerable impact.
Gross Profit Ratio > Operating Profit Ratio > Pretax Profit Ratio

Examples

Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the Pretax 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
  • Solution:
  • Cost of Goods Sold = Cost of Labour + Material Cost = Rs. 90000
  • Operating Expenses = Salary Expense + Rent of Premises + Insurance Expenses = Rs. 145000
  • 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) = Rs. 20000.00
  • Pretax Profit Ratio = PBT / Net Sales Revenue = 20000 / 275000 = 4/55
  • Hence, Pretax Profit Ratio = 4/55 or 0.0727 or 7.27%
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