Category: Commerce Notes PPT

An Oligopoly Market is a system of Markets where there are more than one Vendor (or firm) for trading of a particular good but there are very few Vendors. This is imperfect competition as the decision of one Vendor affects the decision of others in the Market, although the competition is very limited. The main characteristics of this type of Market is the interdependence of the Vendors that urge them to collaborate and compete with each other to control the Market, affecting the demand and supply based on the prices.

Characteristics:

As mentioned above, the main characteristic feature of this type of Market is interdependence of the firms. The other defining features of the Market are:

• Group behaviour: To maintain the Market system, all the firms have to work together.

• Restriction on entry: Entry in a tight knit Oligopoly Market is strictly restricted, new firms trying to grow up or existing Vendors trying to expand have to face serious competition.

• Emphasis on Advertisement: To get a bigger hold of the Market, each Vendor tries to reach out more through advertisements.

Types of Oligopoly Market

Oligopoly Markets can be classified differently based on different factors affecting the Market such as nature of the product, openness of the Market, degree of collaboration between Vendors, functioning and structure of the Market, etc.

Nature of the Market:

1. Pure Oligopoly: The product in this type of Market is Homogenous, for example, the Aluminium Industry.

2. Differentiated Oligopoly: The products are differentiated in this type of Oligopoly Market, for example, the Talcum Powder Industry.

Openness of the Market:

1. Open Market: Here, any new firm trying to enter the Oligopoly Market can compete with the existing firms to establish a hold.

2. Closed Market: Entry is strictly restricted to new firms.

Collaboration between existing Vendors in the Market:

1. Collusive: The firms collaborate with each other and control the product output and Market price for the product.

2. Competitive: In this type of Oligopoly, the Vendors do not co-operate with each other and compete instead.

Functioning of firms:

1. Partial: When a firm takes a big hold of the Market and starts controlling the prices, the other Vendors have to comply accordingly. This is a case of partial Oligopoly Market.

2. Full: When there is no price controlling Vendor and every Vendor works more or less the same way, it is full Oligopoly Market type.

Fixing of products price:

1. Syndicated Oligopoly: When only a very small group or an individual firm controls the sale of products, it is a case of Syndicated Oligopoly.

2. Organised Oligopoly: When all the firms work together to fix output, sale, prices, etcThe Market is called Organised Oligopoly Market.

Interestingly, the Oligopoly Market demand is marked by kinked demand curves. Therefore, oligopolists maximize profits by balancing marginal revenue with the marginal cost of the concerned product.

Partnerships are as old as Businesses. However, there existed very little Legal coverage of the risks involved till new laws were formulated only a few hundred years ago.

There are various Legal formalities involved when two or more people enter into a Partnership. The most basic and common formality is a Partnership Deed. The agreements between the partners, the duties which are distributed between them, and the sharing of profits or losses are all mentioned in such a Deed.

In this article, we shall look at what such a Deed covers and how it is bought to being.

What is a Partnership Deed?

A Partnership Deed or agreement is a detailed Legal charter that dictates all the rights and functionalities of the partners in a Business venture. 

What are the Aspects of a Partnership Deed?

The following aspects are common to every Partnership Deed.

The Deed comes to life when there is an agreement on all Legal matters between the partners. Disagreements may result in a ‘no-Deed’ scenario.

This agreement can be in two different forms – oral or written. However, for Legal reasons and statutes, it is better to have a written partnership agreement.

All such Deeds/agreements come under the aegis of The Indian Partnership Act, 1932. The Act itself does not stipulate that the Deed has to be written in nature. If it is written, however, it is termed a ‘Partnership Deed.’

Such a Deed covers the various existing and foreseeable characteristics which impact the partners. For instance, the elements of profit and risk sharing, the management of the day-to-day business, the distribution of profits, the roles in decision-making, and other essential points are all covered in this Deed.

There are various types of Partnership Deeds, not to mention different types of Partnerships

Modifying a Partnership Deed

A Deed can be modified at any time given the affirmation of all the partners involved. A new Deed has to be drafted and signed by all the partners under the aegis of the Stamp Act and a fresh Deed must be drawn up. To Legally validate it further, the Deed must be registered with the Registrar of Firms.

Registering a Partnership Deed

Since such a Deed carries the weight of law, registering this agreement comes first and has paramount importance. There are certain details that are required when the registration process is initiated. 

The details are the following:

• The name of the firm. It must be different from any existing firm for Legal reasons.

• The details of each partner, including his/her association in any other Business.

• The nature and type of the Business.

• The total planned duration for which the Partnership is likely to run.

• The total amount contributed as capital by each partner must be mentioned.

• How much of the capital each partner can draw at a tie should be mentioned clearly.

• If such drawings attract any interest, that too must be mentioned.

• The rights and duties of each of the partners have to be mentioned in detail.

• Should any partner be receiving any remuneration, there must be a mention of that as well.

• Lastly, the method of sharing profit and loss should be defined well and unambiguously.

What Does a Partnership Deed Contain?

Any general Partnership Deed or agreement must necessarily contain the following information.

The Partnership firm that thus comes up should be mentioned, besides the full details of the partners whether sleeping or active. The name should be mentioned without using extra details like “company”, ”private company”, “proprietorship”.

The nature of the Business should be mentioned, besides details on where the Business premises are located. The origin date, or the date from when the Business starts functioning, must be mentioned clearly.

If there are any branches, they should be detailed too.

If possible, the Partnership’s duration must be mentioned. This cannot be stated in advance at all times; hence, an approximation has to do.

Each partner’s contribution to the business, his or her remuneration, salary (if applicable), and profit-sharing ratio (if applicable) must be detailed.

The Deed must detail if there are terms on whether partners can be suspended, any plans on whether a partner can retire or his terms may superannuate, and whether there are provisions on the expulsion of a partner.

Internal and Legal Audits are important to ensure that a firm is running fairly. The provisions for such Audits must be detailed.

Why is a Partnership Deed Vital?

A Legally accurate and well-drafted Deed has the following benefits.

It lists down the functions, liabilities, responsibilities, and other aspects of a partner in any firm. In future Legal disputes, the terms listed in the Deed are final and there are no chances of deviation. This saves later litigation.

 There exists no confusion on the profit or loss sharing between the partners in question.

The Deed covers every aspect of remuneration, salary or any extra benefit which might be payable to each partner. While these sums may change later, the Deed is the final Legal document for any future dispute.

In short, a Partnership Deed or agreement is essential for a Business to run fairly and profitably.

The information provided above by offers an insight above anything and everything about Partnership Deed. To check for more topics related to commerce or any other subject, make sure to browse through our website.

You might have heard people saying that someone has started a Business by partnering with another person. Do you know what is the procedure for starting a Business or a firm in Partnership? All the partners have some responsibilities which they have to take seriously. They will need to prepare a Partnership Deed to start a Business. In this article, we are going to tell you about the Partnership Deed and what it means. You will also get to know the importance of a Partnership Deed, how to draft a Partnership Deed, etc. 

The chapter of ‘Partnership’ is an important chapter of the CBSE Class 12 Accountancy as well. Every year, a lot of questions are asked from the topics related to the Partnership. So, students need to prepare this topic very helpful as this article will help them in understanding all the concepts very easily. 

A limited Partnership is a document that spells out the terms and conditions of a Partnership between two or more people. One of the most common types of organizations for beginning a new Business is a Partnership firm.

The seamless and successful running of a Partnership firm demands a good understanding of the several policies that regulate their cooperation among its members and this is the reason, you need a Partnership Deed. To help the partners, it clarifies language such as salary, draws, new partner admission, profit/loss sharing, interest on capital, and so on.

Though it is not required, it is always preferable to enter into a Partnership Deed to eliminate any potential conflicts or litigation among the partners. Two or more persons can come to an agreement and all of them should stamp and sign the document.

The Following Characteristics Must be Present in A Partnership Deed:

The firm’s name; the partners’ names and addresses; The nature of the company; The Partnership’s tenure or longevity; The amount of capital that each partner will contribute; The drawings that each pair is capable of producing; The amount of interest that can be charged on capital and drawings; Partners’ rights; partners’ responsibilities; partners’ remuneration The procedure for determining goodwill; Ratio of profit and loss sharing; Executing a Partnership Deed

Establishing a Partnership Deed

As per the value of the Partnership firm’s properties, a Partnership Deed must be printed on Non-Judicial Stamp Paper with a value of Rs.100/- or more. Every partner keeps one original sign for their records, and the Partnership agreement is typically signed in the presence of all partners. After the Partners have signed the paper, it is attested, and the signed Partnership Deed is kept.

Major Benefits of Partnership Deed

A proper Deed establishes Legal obligations amongst the firm’s partners. It is not, however, required to be registered. This means that you will also be able to operate an unregistered Partnership firm.

The following are some examples that will help you to know the importance of a Partnership Deed: 

• It specifies who is responsible for what as this means that the roles of each partner are outlined.

• Because all of the terms and conditions of the Partnership have been written out in advance in the Deed, it helps to avoid any misunderstanding between the partners.

• Any disagreement between the partners can be easily resolved by referring to the Partnership agreement.

• It establishes each partner’s rights, responsibilities, and obligations.

• A Partnership Deed might also include sections that define what partners should be paid in terms of pay (salary). Working partners are typically compensated. However, interest is paid to all partners who have contributed capital to the company.

Planning means deciding in advance what to do, why to do it, and when to do it. It is one of the foremost managerial functions. Before initiating a task, the manager must formulate an idea of how to perform a particular task. Hence, this function of management is closely related to creativity and innovation. A manager can only know where he has to go if he first sets an objective as planning bridges a gap between where we stand today and where we want to reach. Planning is all about what managers at all levels perform. It requires adopting a decision as it involves making a choice from an alternative course of action.

Thus, planning involves setting the target and developing an appropriate method or strategy to attain the desired objective. Planning provides an intellectual approach for attaining the organization’s predetermined goals. Hence, all members need to work together toward achieving organizational goals. These goals set the target which needs to be achieved and against which actual performance is measured. Therefore, planning means setting objectives and targets and developing an action plan to attain them.

The planning that is formulated has a given time frame but time is a limited resource. It needs to be used intelligently. If the timing is not considered, the conditions in the environment may change and all the business plans may go unproductive. Planning may go in vain if it is not implemented.

Planning Definition

Planning is defined as setting an objective for a given time period, developing various strategies or methods to attain them, and then selecting the best possible alternatives from the various methods available.

Feature/ Nature/ Characteristics of Planning

1. Planning Contributes to the Objective- Planning helps in achieving the objective. We cannot think of achieving any objective without any kind of planning. Planning is one of the primary functions of management that contributes immensely to the achievement of predetermined objectives. Planning is The Primary Function of Management- Planning is the first step that any manager or anyone adapts to use to move towards any goal.

2. Pervasive- Planning is universal. Planning is there in every organization, whether it is a small size, mid-size or large size or at whatever level it is, every manager, every individual employee plans on at his/her level.

3. Planning is Futuristic- We do planning for the future. Hence it is called a futuristic process. We always stay in the present and plan for the future. Planning is never done in the past.

4. Planning is Continuous- We plan to achieve any goal.  Planning is done for a specific period of time. It may be for a month, a quarter, or a year.  There is always a need for a new plan after the expiry of that period. Hence it is called a continuous process. The continuation of planning is related to the business cycle. It implies that once the plan is framed and implemented, it is followed by another plan and so on.

5. Planning Involves Decision Making- In planning, function managers evaluate various alternatives and select the most appropriate way to manage things.

6. Planning is a Mental Exercise- In planning, assumptions and predictions regarding the future are made by scanning the environment properly. This activity requires a higher level of intelligence.

Importance/ Significance of Planning

1. Planning Provides Direction- Planning provides us with direction. How to work in the future includes planning. By stating in advance, how work has to be done, planning provides direction for action.

2. Planning Reduces the Risk of Uncertainties- Uncertainty means any events in the future that change our course of action. Planning helps the manager to face uncertainty. We cannot remove such uncertainty from our life. However, due to planning, we can work on such uncertainty. Just like an unforeseen event is going to come in which we are going in loss. So, if we are already ready, we have made funds for it, then we will be able to use it to fight that unforeseen situation.

3. Planning Reduces Overlapping and Wasteful Activity- Overlapping means the working relationship has not been allocated specifically. If we plan, our time will not be wasted.

4. Planning Promotes Innovative Ideas- If you are planning, then you get feedback from your senior managers or juniors, from there you can get innovative ideas. Besides, if you make your employees part of the decision-making, then you can get new creative ideas from there too.

5. Planning Facilitates Decision- Planning helps in decision-making. The more efficient you plan, the more right you will be in the decision. With good planning, our decision-making gets accurate, it becomes feasible and it also gets improved.

6. Planning Establishes a Standard for Controlling- Controlling is incomplete without planning and planning is incomplete without controlling. If you have done the planning but you do not know if the thing is happening or not, then the planning is useless. In case, there is no planned output then the controlling manager will have no base to compare whether the actual output is adequate or not.

7. Focuses Attention on Objectives of that Company- Through planning, efforts of all the employees are directed towards the achievement of organizational goals and objectives.

Limitations of Planning

1. Planning Leads to Rigidity- Once the planning is made, then it gets very difficult to change something in it.

2. Planning May Not Work in a Dynamic Environment- If continual changes are happening in the environment, then planning will not be effective as things will not run according to the plan we have prepared. We have made a plan according to the situation. But If there are continual changes occurring in the environment, then the right prediction, right planning becomes almost impossible.

3. It Reduces Creativity- Planning reduces the creativity of employees of any organization because employees just have to implement the plan which is already decided by the top management. Hence, they do not get the opportunity to show their creativity or their innovativeness. Therefore, much of the initiative or creativity inherent in employees get lost or reduced, and also innovative ideas stop coming.

4. Planning Involves Huge Costs- When plans are formulated, huge costs are involved in their formulation. These may be in terms of time and money. For example, lots of time is spent checking the accuracy of facts. Detailed plans demand scientific calculations to verify facts and figures. The costs incurred sometimes may not justify the benefits derived from the plans. Several incidental costs are also involved, like expenses on boardroom meetings, discussions with professional experts, and preliminary investigations to find out the feasibility of the plan.

Sometimes the plans that are formulated take so much time that there is no time left for their implementation.

5. Planning Does Not Guarantee Success- Planning only provides a base for analyzing for the future. It is not a solution for the future course of action.

6. Lack of Accuracy- In planning, many assumptions are made to decide about the future course of action. Sometimes planning is not accurate. Assuming for the future cannot be 100% accurate.

Planning Process

• Setting up the Objective- Till the manager does not have an objective, he cannot do the planning, so the goal should always be clear.

• Developing Premises- As we know the future is certain, therefore planning is always made keeping the future in mind. Hence in the function of management, certain assumptions are required to be made. These assumptions are known as premises. Premises means making assumptions for the future. The manager can make the assumption by studying the past decisions, policies, studying the facts, and existing plans.

• Listing the Various Alternatives for Achieving the Objectives- After setting up objectives, the managers make a list of alternatives through which the organization can achieve its objectives.

• Evaluation of Different Alternatives- In this step of the planning process, managers evaluate and closely examine each of the alternative plans. Every alternative will go through an examination where all its pros and cons will be weighed. The alternative plans need to be examined taking into account the organizational objectives.

• Selecting an Alternative-  This is the stage of planning in which the manager has to adopt a decision. Here, the manager will choose the best and most feasible plan to implement. The ideal alternative that is selected by the manager should be the most profitable one with the least amount of negative consequences and is also adaptable to dynamic situations.

• Implement the Plan-  This is the step where other managerial functions are also considered. The step is concerned with putting the plan into action, i.e., doing what is required. For example, if a manager makes a plan to increase production then more labor, and more machinery will be required. Hence, this step would also involve arranging for labor and the purchase of machinery.

• Follow Up- To find out whether plans that are formulated are being implemented and activities are performed according to schedule is also part of the planning process. To stick with the plan and follow it in a given time frame is equally important to ensure that organization objectives are attained.

Conclusion

In simple terms, planning is the process of formulating key decisions for an organization to grow successfully in the next few years.

The preparation of trading account is an important concept for the commerce students. All the business accounts that exist need to follow the financial year for making monetary statements and then recording them in the form of documents. The preparation of a trading account is the first step that the businesses must execute to make a final record. It is important that the trading account should be made with great care as it is used for indicating the efficiency level of a business.

With the assistance of the trading account, business organizations are able to observe the exact profit or loss that was incurred in the specific financial year. The data helps the businesses to take the necessary steps or make corrections wherever necessary. This is why the data needs to be accurate and provide efficient reflections of the transactions in a financial year.

The Reasons for Making the Trading Account

When understanding why a trading account is needed, you must know that all the specifications related to costs are documented in this account. This helps with the correct and quick analysis costs, profit, and loss in the overall gross calculation. The management team is responsible for checking if the data matches with each other. If there is a case or situation of abnormality then the management can contact the specific department for rechecking and evaluating the relevant data.

The Features of the Trading Account

The features of the trading account are as follows. The trading account provides the record for total sales that are made by the organization or a business within the specific period of time and the total costs that were incurred. It gives a clear indication to the management or executives of the company on the prospective loss or profit.

The trading account serves as a statement which is important for the trading factors. All the organizations and businesses should be transparent about the trading accounts every year for maintaining a high level of credibility and consistency in the industry. The other trading companies can also check the status of any other business organization. The trading account is usually used by the companies for checking surplus balance. This balance is included in the profit-loss statement. 

The Elements of Trading Accounts

The various elements of trading accounts, based on its contents, includes opening stock, details of purchase, gross profit, direct expenses, gross loss, closing stock, and sales revenue. Each of these elements document important information related to the financial record of the organization that helps the businesses to analyze and make corrections wherever necessary. These elements provide a detailed summary of the entire transactions and serve as a valuable data point for the analysis of financial transactions.

Coordination is one of the prominent functions of management. It is an ongoing process that helps to smooth ongoing activities and communication between the employees, whether they are individuals or groups, or teams. It always aims to minimize friction and maximize collaborative efficiency. Let us explore more about the principles of coordination, techniques of coordination, etc.

Meaning of Coordination

Coordination is very important in management. The business has multiple functions. These functions are performed by different people. In addition, performing these functions requires division of labour and grouping activities and decision-making at different levels. These need to be coordinated to achieve the desired goals. Coordination involves synchronizing, integrating, or unifying the actions of all groups in the enterprise to achieve its goals. It is a process in which managers balance the activities of different individuals and individual groups, reconcile their differences in interests or methods, to achieve a common goal, achieving a harmonious group effort and unity of action.

Defined by Mcfarland, “Coordination is the process whereby an executive develops an orderly pattern of group efforts among his subordinates and secures the unity of actions in pursuing a common purpose.”

Principles of Effective Coordination

As coordination plays a vital role in the organization, every manager tries to maintain good collaboration with other executives which helps in the growth of the organization. That’s the reason managers need to understand and implement some principles to attain effective coordination. Mary Parker Follett has given a set of principles of effective coordination.

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They are,

1. Early Stage:- This is the most important principle of coordination, which specifies that the coordination should start at an early stage or initial stage of the organization. If proper coordination has been done before the planning system, we can provide effective plants that automatically develop the name and fame of the organization.

2. Personnel Contract:- Coordination itself is a process involved with human resources. If the direct contact of personnel is implemented, it eradicates Several conflicts and misunderstandings. Face-to-face communications, group discussions, grievances, and settlement methods come under this principle.

3. Continuity:- It is the most important principle of coordination. Because it is a continuous process and cannot be left or restricted to some activities. The entire organization requires coordination around the clock.

4. Reciprocal Relationship:- It is the best principle of effective coordination. Because the coordination will be in a two-way direction. If the purchasing department works with the sales department, the sales department again needs to work with the finance department. Similarly, the communication I’m the influence but also done in the same way. Every person needs to communicate with another person, and if one person influences the other, he might be influenced by any third person. So the coordination should be reciprocally also.

5. Dynamism:- The process, principles, and techniques of coordination should not be static. Based on the requirements and the scenarios, it keeps on changing according to the context spontaneously.

6. Simplified Organization:- This principle also achieves effective coordination. It is merely like a divide and rule policy. If the size of the organization is too large, it can be divided into several departments, and each department should have a coordinator or coordination head. He will look after all the collaborations, delegations, etc.

7. Self-Coordination:- This principle explains that expecting coordination from other departments is as essential as maintaining the same thing in our department. It is like giving respect and taking respect. Initially, if we are perfect, then we can expect the same thing from others. So self-coordination is the initial measure or principle of effective coordination.

8. Clear-Cut Objectives:- the objectives and standards were set by high-level management. These objectives should be properly facilitated and create awareness of all the departmental heads and other employees. All the employees have a clear idea of what they need to achieve; then they can work according to that.

9. Clear Definition of Authority and Responsibility:- The high cutter employees should explain and define the authorities and responsibilities to the respected person, and it should be explained to all the lower-level employees. Every employee needs to understand to whom he needs to report and what are his responsibilities. This kind of coordination is significant for a healthy organization.

10. Effective Communication:– Communication is the basic principle of coordination. Clear and proper communication avoids several problems and provides multiple solutions for a single problem. So proper communication should be I’m graduating within the staff, which helps to exhibit their skills.

11. Effective Supervision:- the high-end executives should monitor and supervise all subordinate’s works regularly. They should not neglect their responsibility and should not mislead their supervision. This helps to maintain effective coordination as well as reduce the chances of making mistakes.

These are the various principles formulated by Mary Parker Follett for the growth of the organization in terms of quality and quantity. As it is clear that Principles and techniques of coordination are dynamic, the techniques of coordination had formulated with different opinions. The generalized techniques of coordination are categorized as:

Features of Coordination

The features of coordination are: 

1. Coordination focuses on integrating collective efforts, not the integration of individual efforts.  

It involves arranging the activities of a group of people in an orderly manner. However, individual performance is related to collective performance.

2. Coordination is a concerted effort to give the necessary quality and quantity at the right time. 

Coordination means cooperation, that is, collective effort, plus time and direction.  According to Haimann: “Coordination is the orderly synchronization of efforts of the subordinates to provide the proper amount, timing and quality of execution so that their unified efforts lead to the stated objective, namely the common purpose of the enterprise.”

3. Coordination is a continuous and dynamic process. 

It is a continuous concept because it is realized through the execution of functions. It is dynamic because the function itself is dynamic and may change over time.

4.  Coordination has three important elements: balancing, timing and integrating

Different activities can only be coordinated when different responsibilities are performed at the right time and in the right amount.

5.  Coordination and cooperation tasks do not mean the same thing. 

Cooperation simply means that two or more people voluntarily participate in the execution of certain tasks through collective efforts. But it has nothing to do with the time, amount, and direction dimensions of the team’s efforts. In contrast, coordination means applying the necessary team effort in the right direction at the right time by deliberately executing actions.

6. Every manager is responsible for coordination.

Every manager in the organization is responsible for coordination because he aims to synchronize the efforts of his subordinates with others.

7. Coordination can be internal or external.

Coordination is to be used both inside and outside the company as a blending factor for all activities and endeavors. In another way, coordination can take place both internally and externally. Internal coordination refers to the coordination of actions between employees, departments, and supervisors at different levels inside a company. 

Outside the enterprise, coordination work is extended to create a harmonious relationship with the competitors, suppliers, and customers activities; technological and technical advances of the time, government regulatory measures, national and international interdependence, as well as the wishes and wants, likes and dislikes of consumers, employees, and owners.

8. Coordination can be horizontal or vertical.

Coordination between horizontal departments at the same level in the managerial hierarchy is known as horizontal coordination. For example, coordination between the sales manager, the work manager, the finance manager, and the buyer is necessary so that when the sales department is ready to sell the new product, the production department will be able to fill the orders; and financial arrangements are made so that the necessary funds are available to obtain the correct raw material and other factors.

Vertical coordination occurs between the multiple links of the different levels of the organization. Take the production department, for example, where the work manager is followed by the superintendent, then the foreman, and lastly, the workers.

Techniques of Coordination

1. Structural and Formal Techniques 

• Departmentalization 

• Centralization/Decentralization 

• Formalization and Standardization Planning 

• Output and Behavioural Control.

2. Informal and Subtle Techniques. 

These are the various principles and techniques of coordination which each principle and technique has its significance and strive for the growth of the company.

Profitability ratios are financial metrics to gauge and assess the capacity of an organization to produce a profit in relation to its revenue, balance sheet assets, or stakeholder’s equity, operation costs during a definite period. This metric used by investors and market gurus can be compared with efficiency ratios, which judge the optimal utility of internal resources to generate profit. 

What Does it Mean by a Higher Profitability Ratio?

A higher profitability ratio implies the organization is operating well, generating enough profit, cash flow and revenue, long-term investors like to invest in such well-managed companies. This metric gives a reasonable comparison of performance with peers or the preceding period.

Two Types of Profitability Ratios

All profitability ratios can be categorized into segments;

1. Margin Ratios 

This metric represents the firm’s capacity to transform sales into profit at various points in time. Examples of margin ratios are gross profit margin, net profit margin, cash flow margin, operating profit margin, EBIT (Earnings before interest and taxes), EBITDA (Earnings before interest and taxes, depreciation, amortization), operating expense ratio and overhead ratio.

2. Return Ratios

This parameter states the organization’s ability to produce a return to the shareholders. Return on assets, return on equity, return on debt, return on revenue, cash return on assets, return on invested capital are examples of margin ratios.  

What is the profitability ratio? Answer to it is a metric to analyze the productivity of the business by weighing against sales, assets, and equity.  

Importance of Profitability Ratio

Profitability profit analysis states the final performance of the company, how profitable the venture is. Profitability analysis also represents how the stakeholder’s equity has been utilized by the organization.

There are different profitability ratio formulas used by entities to analyze the financial performance and stability of the business. 

• Gross Profit Margin is the most used profitability ratio formulas stating the difference between revenue and cost of production, also known as cost of goods sold (COGS). Some sectors experience seasonality in their business operations. For instance, patisserie firms experience considerably higher revenue and profit earning during the Christmas holiday season. It would be more effective and informative to compare the fourth-quarter profit margin with the fourth quarter of last year than to the first quarter of the previous period.

• EBITDA (Earnings before interest, taxes depreciation, and amortization) states the profitability of a firm before deducting non-operation items such as interest and taxes and non-cash items like depreciation and amortization. The usefulness of this metric is to compare performance with peers since it excludes expenses that could be variable.

• Operating Profit Margin is one of the profitability ratios examples that represent profit as a percentage of sales before deducting interest and income tax. Companies with higher operating profit margins have an adequate reserve to pay interest and other fixed costs and have a better probability of surviving an economic meltdown. Due to higher profitability, they can offer products at a lower price than competitors.

• Net Profit Margin Means this metric represents the bottom line, the net profit after deducting interest and taxes. This profitability measure considers every aspect of accounts, but the disadvantage is it takes into account one-time gains and expenses, producing a lot of noise.

Useful Metrics in the Equity Market

Informative investors and corporate equity buyers also use these types of profitability ratios.

This profitability ratio represents the return on the invested equity and how it has been utilized to breed revenue of the company. Return on equity profitability ratio formula is profit after tax divided by net worth, where it stands for equity share capital and reserve and surplus.

This ratio is important from the standpoint of ordinary shareholders as it is calculated by net profit divided by the total number of shares outstanding.

This ratio exhibits the total amount of dividends distributed among stakeholders, which is derived by dividing the number of dividends distributed by the number of shares outstanding. 

This metric is useful to determine if the stock value is overvalued or undervalued. This ratio also gives insight into expected earning and incentives to stakeholders. The formula of this ratio is the market price of a share divided by EPS (earning per share).

Hopefully, the article has covered all the significant information regarding profitability ratio in detail.