Profit ratio

Profit ratio is a financial metric that represents the proportion of an enterprise’s profits relative to its capital or net worth. It is often used as a measure of financial performance and, in some cases, as a basis for taxation.

Key Features Definition Profit Ratio = Profit/Capital or Net Worth×100 Expressed as a percentage, it indicates how effectively a company generates profit from its capital.

Basis for Comparison: Helps investors, management, and tax authorities assess return on investment.

Use in Taxation: In certain tax regimes, estimated profits or presumptive taxes may be calculated using a fixed profit ratio applied to the capital or net worth of a business. Simplifies tax assessment for small or unorganized businesses.

Economic Significance: Reflects financial efficiency and operational performance. Higher profit ratios generally indicate better utilization of capital.

Example: A business has: Net worth = ₹50,00,000 Annual profit = ₹5,00,000 Profit Ratio= 5,00,000/50,00,000×100=10% This indicates the company earns a 10% return on its net worth.