Determination of Operating Profit Margin Ratio

The operating profit margin is one type of profitability ratio also known as margin ratio. Operating profit margin indicates the operational efficiency of the company.i.e contributions on company’s profitability.

Other Operating income                                                               10,18,313

Selling & Distribution Costs                                                           (5,75,275)

Administrative costs                                                                       (3,25,130)

Other Operating expenses                                                              (133,120)

Operating Profit /EBIT                                                                 17,37,372

Interest Expenses                                                                                (25,575)

Interest Income                                                                                   18,258

Profit from investment                                                                        13,250

Earning before tax                                                                         17,43,305

Income Taxes                                                                                      (33,575)

Net Profit after tax                                                                         17,76,880

Using the formula,

Operating Profit Margin Ratio = Operating profit/Net Revenue x 100

Here, Operating Profit               = 17,37,372

Net Revenue                    = 69,28,114

so, Operating profit ratio = 17,37,372/69,28,114 x 100 = 25.08%

Importance of Operating Profit Margin ratio

This ratio is the reliable indicator of a company’s financial health. To judge whether operating profit margin ratio is effective, you have to compare it with other similar companies.

A company which has a high operating profit ratio is better able to pay for their fixed costs and interest on loan, to survive on economical crisis, more competitive than any other company because of their higher profit margin ratio.However, this is a useful indicator of a company’s efficiency.

Limitations of the Ratio

Data provided on financial statement may not accurate, that may provide false operating profit which result might not be reliable or financial statements that were prepared using inconsistent accounting records.

Another limitation is operating margin ratio also does not factor in any qualitative information about a company, nor does it give any indication of the probability of future results.