 Profitability Ratios and QuickBooks 2014 - dummies

Profitability ratios analyze a firm’s profitability, and you can use them in QuickBooks. In a sense, 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 simply by dividing the firm’s fixed costs by its gross margin percentage.

Operating income/sales

In the case of the business shown in the following income statement, 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

 Sales revenue \$150,000 Less: Cost of goods sold 30,000 Gross margin \$120,000 Rent 5,000 Wages 50,000 Supplies 5,000 Total operating expenses 60,000 Operating income 60,000 Interest expense (10,000) Net income \$50,000

This formula returns the value 0.4. In other words, you see a 40 percent operating margin, which 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 is that you want to be competitive. You want your operating margin percentage to be close to or better than those of your competitors. 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 the business described by the income statement shown, the net income equals \$50,000, and sales equal \$150,000. This 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.