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Home Accounting Ratios Analysis/Financial Ratios Analysis Gross Profit Ratio (GP Ratio)
 
 

Gross Profit Ratio (GP Ratio):

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Definition and Explanation:

Gross profit ratio is the ratio of gross profit to net sales i.e. sales less sales returns. The ratio thus reflects the margin of profit that a concern is able to earn on its trading and manufacturing activity. It is the most commonly calculated ratio. It is employed for inter-firm and inter-firm comparison of trading results.

Formula:

 Following formula is used to calculated gross profit ratio (GP Ratio):

Gross profit / (Net sales 100)

Where Gross profit = Net sales - Cost of goods sold

Cost of goods sold = Opening stock + Net purchases + Direct expenses - Closing stock

Net sales = Sales - Returns inwards

Gross profit is what is revealed by the trading account. It results from the difference between net sales and cost of goods sold without taking into account expenses generally charged to the profit and loss account. The larger the gap, the greater is the scope for absorbing various expenses on administration, maintenance, arranging finance, selling and distribution and yet leaving net profit for the proprietors or shareholders.

In case, there is increase in the percentage of gross profit as compared to the previous year, it is indicator of one or more of the following factors.

  • The selling price of the goods has gone up without corresponding increase in the cost of goods sold.
  • The cost of goods sold has gone down without corresponding decrease in the selling price of the goods.
  • Purchases might have been omitted or sales figures might have been inflated.
  • The valuation of the opening stock is lower than what it should be or the valuation of the closing stock is higher than what it should be.
  • In case, there a decrease in the rate of gross profit, it may be due to one or more of the following reasons.
  • There may be decrease in the selling rate of the goods sold without corresponding decrease in the cost of goods sold.
  • There may be increase in the cost of goods sold without corresponding increase in the selling price of the goods sold.
  • There may be omission of sales.
  • Stock at the end may have been under-valued or opening stock may have been over-valued.

Example:

Calculate gross profit ratio (GP Ratio) from the following particulars.
 

particulars

$

particulars

$
Sales 1,55,000 Purchases 80,000
Sales returns 5,000 Purchases returns 10,000
Opening stock 40,000 Closing stock 10,000

Solution:

Cost of goods sold = Opening stock + Net purchases - Closing stock

= 40,000 + 70,000 - 10,000

= 1,00,000

Net sales = 1,55,000 - 5,000

= 150,000

Gross profit = 1,50,000 - 1,00,000

= 50,000

Gross profit ratio = (50,000 / 1,50,000) x 100

= 33.33 %

More study material from this to
 

More study material from this topic:

Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratio
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis

 

 
 

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Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
----------------------------------------------------------------------------
  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
----------------------------------------------------------------------------
  Variable Costing System
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  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
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  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 
 

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