AccountsISC Class 12 · Ratio Analysis

Profitability Ratios: GP, NP, Operating, Operating Profit, EPS, P/E and ROI

Updated 17 October 2026 · Draft, not yet fact-checked

Profitability ratios measure earnings. Gross Profit Ratio = Gross Profit ÷ Revenue from Operations × 100. Net Profit Ratio = Net Profit after Tax ÷ Revenue from Operations × 100. Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) ÷ Revenue from Operations × 100. Operating Profit Ratio = Net Operating Profit ÷ Revenue × 100. EPS = (PAT − Preference Dividend) ÷ Equity Shares. P/E = Market Price ÷ EPS. ROI = NPBIT ÷ Capital Employed × 100.

Understand Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI

Seven ratios, one source. All the profitability ratios in the ISC syllabus are built from the Statement of Profit and Loss and a few Balance Sheet items. The syllabus fixes the meaning of each term.

Revenue from operations (manufacturing company): net sales and sale of scrap. Other income: rent received (non-operating), commission received (operating), interest and dividend received (non-operating), profit on sale of fixed assets (non-operating), cash discount received (operating).

1. Gross Profit Ratio = Gross Profit ÷ Revenue from Operations × 100, where Gross Profit = Revenue from Operations − Cost of Revenue from Operations.

2. Net Profit Ratio = Net Profit ÷ Revenue from Operations × 100, calculated on Net Profit after Tax, where Net Profit = Gross Profit + Other Income − Indirect Expenses − Provision for Tax.

3. Operating Ratio = (Cost of Revenue from Operations + Operating Expenses) ÷ Revenue from Operations × 100, or, subtracting Operating Income in the numerator, (Cost of Revenue + Operating Expenses − Operating Income) ÷ Revenue × 100.

Operating Expenses = Employee Benefit Expenses + Depreciation of Tangible Assets + Selling and Distribution Expenses + Office and Administrative Expenses.
Operating Income = commission received and cash discount received.

4. Operating Profit Ratio = Net Operating Profit ÷ Revenue from Operations × 100, where Net Operating Profit = Gross Profit − Operating Expenses + Operating Incomes; or Net Profit after Tax + Provision for Tax + Non-operating Expenses − Non-operating Incomes.

Non-operating Expenses = finance cost (interest on long-term borrowings) + loss on sale of non-current assets + amortisation of intangible assets + writing off of capital losses.
Non-operating Incomes = rent received + interest and dividend received on investments + profit on sale of non-current assets.

5. Earning per Share (EPS) = (Net Profit after Tax − Preference Dividend) ÷ Number of Equity Shares.

6. Price Earning (P/E) Ratio = Market Value of an Equity Share ÷ EPS, in times.

7. Return on Investment (ROI) = Net Profit before Interest and Tax ÷ Capital Employed × 100. Capital Employed = Shareholders' Funds + Non-current Liabilities − Non-trade Investments (or Non-current Assets excluding non-trade investments + Working Capital). Interest on non-trade investments is not part of the numerator (investments are non-trade unless stated otherwise).

Interpretation. When Operating Income is deducted in the numerator, Operating Ratio + Operating Profit Ratio = 100%. If Operating Income is not deducted, the sum exceeds 100% by Operating Income ÷ Revenue × 100. Non-operating items affect neither ratio. A gross profit ratio can stay constant while the net profit ratio falls, which points to higher indirect expenses.

Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI: key facts

Gross Profit Ratio: Gross Profit ÷ Revenue from Operations × 100 | Gross Profit = Revenue − Cost of Revenue; In per cent.
Net Profit Ratio: Net Profit after Tax ÷ Revenue from Operations × 100 | Net Profit = Gross Profit + Other Income − Indirect Expenses − Tax; Syllabus: after tax.
Operating Ratio: (Cost of Revenue + Operating Expenses) ÷ Revenue × 100 | or minus Operating Income; Operating expenses as listed in the syllabus.
Operating Profit Ratio: Net Operating Profit ÷ Revenue × 100 | Net Operating Profit = Gross Profit − Operating Expenses + Operating Incomes; Cross-check with the PAT route.
Earning per Share: (Net Profit after Tax − Preference Dividend) ÷ Number of Equity Shares | in rupees per share; In rupees per share.
Price Earning Ratio: Market Value of an Equity Share ÷ Earning per Share | in times; Needs a market price.
Return on Investment: Net Profit before Interest and Tax ÷ Capital Employed × 100 | Capital Employed = Shareholders' Funds + Non-current Liabilities − Non-trade Investments; Excludes interest on non-trade investments.

How to answer Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI questions

Draw out a mini Statement of Profit and Loss first; every ratio then drops out.

1Compute gross profit and net profit after tax from the data.
2Sort expenses into cost of revenue, operating expenses and non-operating items.
3Sort other income into operating and non-operating.
4Apply the formula for each ratio; show numerator and denominator.
5For ROI, find capital employed and remove non-trade investment interest from the numerator.

Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Where profit leaks

Suppose two cafes each earn revenue of ₹10,00,000. Cafe A has a gross profit of ₹4,00,000 and a net profit after tax of ₹80,000. Cafe B has a gross profit of ₹2,50,000 and a net profit after tax of ₹1,00,000.

Which cafe keeps more of each rupee of revenue, and where does Cafe A lose it?

Try it first, then show the solutionSolution

Net profit ratio: A = 80,000 ÷ 10,00,000 = 8%; B = 10%.
Gross profit ratio: A = 40%; B = 25%.
A loses 4,00,000 − 80,000 = ₹3,20,000 to expenses and tax; B loses 2,50,000 − 1,00,000 = ₹1,50,000.

Answer: B keeps 10% against 8%; A's overheads and tax absorb far more of its gross profit.

Memory hook: A high gross profit is not the same as a high net profit.

Tricks to remember Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI

Short memory aids. Say each one aloud once, then use it on a question the same day.

G-N-O-O-E-P-R
Gross, Net, Operating, Operating profit, EPS, P/E, ROI: the seven in syllabus order.
Use it when: Listing the ratios.
Opex has four heads
Employee benefits, tangible depreciation, selling and distribution, office and administration.
Use it when: Operating expenses.
PAT + tax + non-op expenses − non-op incomes
The second route to net operating profit.
Use it when: Cross-check.

Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Gross profit ratio · 1 mark · MCQBoard level

Revenue from operations is ₹5,00,000 and cost of revenue from operations is ₹3,50,000. The gross profit ratio is:
(a) 30%
(b) 70%
(c) 42.86%
(d) 15%

Try it first, then show the solutionSolution

Gross profit = 5,00,000 − 3,50,000 = ₹1,50,000.
Ratio = 1,50,000 ÷ 5,00,000 × 100 = 30%.

Answer: (a) 30%

Example 2: Net profit ratio · 3 marks · Short answerBoard level

Revenue from operations ₹8,00,000; gross profit ₹2,40,000; other income ₹20,000; indirect expenses ₹1,40,000; provision for tax ₹30,000. Calculate the net profit ratio. (3 marks)

Try it first, then show the solutionSolution

Net profit after tax = 2,40,000 + 20,000 − 1,40,000 − 30,000 = ₹90,000.
Ratio = 90,000 ÷ 8,00,000 × 100 = 11.25%.

Answer: Net profit ratio = 11.25%.

Example 3: Four profit ratios from one set of figures · 6 marks · Long answerHarder board level

Willow Ltd. has Revenue from operations ₹20,00,000 (net sales ₹19,50,000 and sale of scrap ₹50,000) and cost of revenue from operations ₹12,00,000. Other income: commission received ₹30,000; interest on non-trade investments ₹20,000; profit on sale of machinery ₹10,000. Expenses: employee benefits ₹2,00,000; depreciation of tangible assets ₹80,000; selling and distribution ₹1,20,000; office and administration ₹60,000; interest on long-term borrowings ₹40,000; amortisation of patents ₹10,000. Tax is 30% of profit before tax. Calculate the gross profit ratio, net profit ratio, operating ratio (without deducting operating income) and operating profit ratio. (6 marks)

Try it first, then show the solutionSolution

Gross profit = 20,00,000 − 12,00,000 = ₹8,00,000; ratio = 40%.
Other income = 30,000 + 20,000 + 10,000 = ₹60,000; indirect expenses = 2,00,000 + 80,000 + 1,20,000 + 60,000 + 40,000 + 10,000 = ₹5,10,000.
Profit before tax = 8,00,000 + 60,000 − 5,10,000 = ₹3,50,000; tax = ₹1,05,000; PAT = ₹2,45,000; net profit ratio = 12.25%.
Operating expenses = 2,00,000 + 80,000 + 1,20,000 + 60,000 = ₹4,60,000; operating ratio = (12,00,000 + 4,60,000) ÷ 20,00,000 × 100 = 83%.
Net operating profit = 8,00,000 − 4,60,000 + 30,000 = ₹3,70,000; check: 2,45,000 + 1,05,000 + (40,000 + 10,000) − (20,000 + 10,000) = ₹3,70,000. Operating profit ratio = 18.50%.

Answer: Gross profit ratio 40%; net profit ratio 12.25%; operating ratio 83% (81.50% if commission received of ₹30,000 is deducted); operating profit ratio 18.50%.

Example 4: EPS, P/E and ROI · 6 marks · Long answerHarder board level

Continuing with Willow Ltd.: it has 50,000 equity shares of ₹10 each and 10% preference share capital of ₹2,00,000 (dividend paid). The market price of an equity share is ₹54. Shareholders' funds are ₹12,00,000 (equity ₹5,00,000, preference ₹2,00,000, reserves ₹5,00,000), non-current liabilities ₹4,00,000 and non-trade investments ₹2,00,000. Calculate EPS, price earning ratio and return on investment. (6 marks)

Try it first, then show the solutionSolution

Preference dividend = 10% × 2,00,000 = ₹20,000; earnings for equity = 2,45,000 − 20,000 = ₹2,25,000.
EPS = 2,25,000 ÷ 50,000 = ₹4.50.
P/E = 54 ÷ 4.50 = 12 times.
NPBIT = profit before tax 3,50,000 + interest on long-term borrowings 40,000 − interest on non-trade investments 20,000 = ₹3,70,000.
Capital employed = 12,00,000 + 4,00,000 − 2,00,000 = ₹14,00,000; ROI = 3,70,000 ÷ 14,00,000 × 100 = 26.43%.

Answer: EPS ₹4.50; P/E ratio 12 times; ROI 26.43%.

Example 5: Constant gross margin, falling net margin · 3 marks · Short answerHOTS / competency

In year 1, revenue was ₹10,00,000, gross profit ₹3,00,000 and net profit after tax ₹1,00,000. In year 2, revenue was ₹12,00,000, gross profit ₹3,60,000 and net profit after tax ₹90,000. Compare the two ratios and explain what changed. (3 marks)

Try it first, then show the solutionSolution

Gross profit ratio: 3,00,000 ÷ 10,00,000 = 30%; 3,60,000 ÷ 12,00,000 = 30%.
Net profit ratio: 10% in year 1 and 90,000 ÷ 12,00,000 = 7.5% in year 2.
Direct margins held, but gross profit that went into expenses and tax rose from ₹2,00,000 to ₹2,70,000, so indirect costs or tax rose faster than sales.

Answer: Gross profit ratio stayed at 30%; net profit ratio fell from 10% to 7.5%. Indirect expenses and tax grew faster than revenue.

Where students lose marks in Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI

The slips examiners see most often, and what to write instead.

Mistake: Net profit ratio on profit before tax
Stopping before the tax line.
Wrong working
3,50,000 ÷ 20,00,000 = 17.5%
Right working
2,45,000 ÷ 20,00,000 = 12.25%
Do this: The syllabus says net profit after tax.
Usually costs: 2 marks.
Mistake: Including finance cost in operating expenses
Seeing interest as an expense.
Wrong working
Operating expenses = 5,00,000
Right working
Operating expenses = 4,60,000; finance cost is non-operating
Do this: Use the four-head list.
Usually costs: 2 marks.
Mistake: Not removing interest on investments in ROI
Using profit before tax plus interest only.
Wrong working
NPBIT = 3,90,000
Right working
NPBIT = 3,90,000 − 20,000 = 3,70,000
Do this: Exclude interest on non-trade investments, and remove the investments from capital employed.
Usually costs: 1-2 marks.
Mistake: Dividing EPS by total shares including preference
Mixing share classes.
Wrong working
2,45,000 ÷ 70,000
Right working
(2,45,000 − 20,000) ÷ 50,000
Do this: Only equity shares; deduct preference dividend first.
Usually costs: 1-2 marks.

Exam tips

Start with a rough Statement of Profit and Loss so every ratio uses the same numbers.
Show both routes for net operating profit when the data allow it.
State the base for every percentage: Revenue from operations.
Write EPS in rupees and P/E in times.

Practice questions on Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
A company earned a profit after tax of ₹2,40,000 and paid a preference dividend of ₹40,000. It has 40,000 equity shares. Its earning per share is:
(a) ₹6.00
(b) ₹5.00
(c) ₹5.50
(d) ₹4.00
Hint
Deduct preference dividend first.
Answer
(b) ₹5.00
Q2 · 3 marks · Short answerBoard level
Profit after tax ₹4,50,000, preference dividend ₹50,000, 80,000 equity shares, market price ₹60 per share. Calculate EPS and the price earning ratio. (3 marks)
Hint
Earnings for equity shareholders = 4,00,000.
Answer
EPS = ₹5.00; P/E = 60 ÷ 5 = 12 times.
Q3 · 3 marks · Short answerHarder board level
Net profit before tax ₹2,00,000 after interest of ₹30,000 on long-term borrowings; it includes interest of ₹10,000 on non-trade investments. Shareholders' funds ₹8,00,000, non-current liabilities ₹3,00,000, non-trade investments ₹1,00,000. Calculate the return on investment. (3 marks)
Hint
Adjust both numerator and capital employed.
Answer
NPBIT = 2,00,000 + 30,000 − 10,000 = ₹2,20,000; capital employed = 8,00,000 + 3,00,000 − 1,00,000 = ₹10,00,000; ROI = 22%.
Q4 · 6 marks · Long answerHarder board level
Revenue from operations ₹15,00,000; cost of revenue ₹9,00,000. Employee benefits ₹1,50,000; depreciation of tangible assets ₹60,000; selling and distribution ₹90,000; office and administration ₹50,000; commission received ₹20,000; cash discount received ₹10,000; interest on long-term borrowings ₹30,000; loss on sale of machinery ₹15,000; interest received on investments ₹12,000; profit on sale of non-current assets ₹8,000. Tax rate 30%. Calculate the operating ratio (deducting operating income) and the operating profit ratio, checking net operating profit by the PAT route. (6 marks)
Hint
Operating income = 30,000.
Answer
Operating expenses = 3,50,000. Operating ratio = (9,00,000 + 3,50,000 − 30,000) ÷ 15,00,000 × 100 = 81.33%. Net operating profit = 6,00,000 − 3,50,000 + 30,000 = ₹2,80,000; ratio = 18.67%. Check: PBT = 6,00,000 + 50,000 − 3,95,000 = 2,55,000; PAT = 1,78,500; 1,78,500 + 76,500 + 45,000 − 20,000 = ₹2,80,000.
Q5 · 3 marks · Short answerHOTS / competency
Cafe X has revenue of ₹10,00,000, gross profit ₹4,00,000 and net profit after tax ₹80,000; Cafe Y has the same revenue, gross profit ₹2,50,000 and net profit after tax ₹1,00,000. Find the amount of gross profit lost to expenses and tax in each, and say which manages overheads better. (3 marks)
Hint
Gross profit minus net profit.
Answer
X: 4,00,000 − 80,000 = ₹3,20,000 (80% of its gross profit). Y: 2,50,000 − 1,00,000 = ₹1,50,000 (60%). Y manages overheads better despite the lower gross margin.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Net profit ratio is on which profit?Show answer
Net profit after tax.
2.Operating expenses in the syllabus?Show answer
Employee benefits, depreciation of tangible assets, selling and distribution, office and administration.
3.EPS formula?Show answer
(PAT − preference dividend) ÷ number of equity shares.
4.P/E formula?Show answer
Market value of an equity share ÷ EPS.
5.ROI numerator?Show answer
Net profit before interest and tax.

Profitability Ratios: Gross Profit, Net Profit, Operating Ratios, EPS, P/E and ROI: frequently asked questions

Is commission received operating or non-operating?

Operating, as listed in the syllabus; so are cash discount received.

Is interest on long-term borrowings operating?

No. It is finance cost, a non-operating expense.

Which capital employed is used for ROI?

Shareholders' funds plus non-current liabilities less non-trade investments, or the equivalent assets-side route.

Is sale of scrap included in revenue?

Yes, for a manufacturing company, along with net sales.