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.
$$Pretax\quad Profit\quad Ratio=$$$$\frac { Profit\quad Before\quad Taxes(PBT) }{ Net\quad Sales} $$
$$Pretax\quad Profit\quad Ratio=$$$$\frac { Profit\quad Before\quad Taxes(PBT) }{ Net\quad Sales} $$
- Significance and InterpretationWhere, 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.
- 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
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
Pretax Profit Ratio = PBT / Net Sales Revenue
Pretax Profit Ratio = PBT / Net Sales Revenue
⇨ 20000 / 275000
⇨ 4/55
Hence, Pretax Profit Ratio = 4/55 or 0.0727 or 7.27%
Hence, Pretax Profit Ratio = 4/55 or 0.0727 or 7.27%
