Profitability Ratios and QuickBooks 2012

Profitability ratios analyze a firm’s profitability, and you can use them in QuickBooks 2012. In a sense, these profitability ratios are the most important ratios that you can calculate. They typically provide terribly useful insights into how profitable a firm is and why.

For example, one particularly important profitability ratio is the gross margin percentage, which expresses gross margin as a percent of sales. You can calculate a firm’s break-even point by simply dividing the firm’s fixed costs by its gross margin percentage.

A couple of other profitability ratios you need to understand are the net operating margin percentage and profit margin percentage.

Operating income/sales

In a case where operating income equals $60,000 and sales equal $150,000, you calculate the net operating margin percentage by using this formula:

$60,000/$150,000

This formula returns the value 0.4. A 0.4 operating margin percentage, which is equivalent to 40 percent, indicates that a firm’s operating income equals 40 percent of its sales.

No guideline exists for what a net operating margin percentage should be. Your main consideration, which you will probably find yourself repeating in your sleep after hearing me say it so much, is that you want to be competitive. You want your operating margin percentage to be close to or better than those of your competitors’ net operating margin percentages. That parity (or superiority) enables you to stay competitive.

Profit margin percentage

The profit margin percentage works like the net operating margin percentage; it expresses the firm’s net income as a percentage of sales, as shown in the following formula:

net income/sales

In the case of a business in which the net income equals $50,000 and sales equal $150,000, the firm’s profit margin percentage, therefore, can be calculated with the following formula:

$50,000/$150,000

This formula returns a financial ratio of 0.33. This indicates that the firm’s net income equals roughly 33 percent of its sales.

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