Sample Thesis Paper
The Net Profit to Sales Ratio or the Net Profit Margin is calculated by dividing Net Profit by the Sales Revenue figure for a given year. For obvious reasons, the higher the ratio, the better it is for the company in question. Net Profit is expressed as a percentage of Sales by using this ratio. A high Net Profit to Sales Ratio, however, does not mean anything unless compared to the ratios for firms in the same industry or for different years. For example, even if a firm has a Net Profit to Sales Ratio of 15 % – which is generally high for most industries – it is still low if the industry average is say 18 % or the Net Profit to Sales Ratio for the previous year is 17 % (Berman et al 2006).
Gross Profit to Sales Ratio
This ratio is calculated by dividing the Gross Profit / Gross Income by the Sales Revenue figure for the same period. Gross Profit is calculated by subtracting the firm’s Cost of Goods Sold / Cost of Sales from the Sales Revenue figure for the same period. The resulting gross profit figure is then divided by Sales Revenue to achieve the Gross Profit to Sales Ratio. This ratio shows whether the company has been using resources such as direct and indirect material and labour and other overheads in a way that minimizes the costs and is reflected in the Gross Profit to Sales percentage. As it is clearly understood, the higher the Gross Profit to Sales Ratio, the more favourable it is for the company (Berman et al 2006).