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.**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.__If the increase in Pretax Profit Margin < Increase in Gross Profit Margin:__

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%**