Applied Accounting

Company Profitability and Solvency Status

Profitability of any company refers to a term showing the company’s income is higher than its expenses while the solvency of the company means its ability to meet its long term debts and obligations.

Company’s profitability can be estimated by below ratios:-

  • Gross Profit Ratio – Company’s manufacturing or marketing ability can be derived from Gross profit Ration.

Gross Profit Ration = Gross Profit/Sales



97.5% is very high gross profit ration , however, this is affected by the fact that most of the goods sold were part of inventory.

  • Net Profit Ratio – Overall profitability of any company can be best estimated by Net profit Ration

Net Profit Ratio = Net Profit/Sales



46.3% net profit ratio is considered to be very sound however for better idea it is always better to compare the same with industry benchmarks as well

  • Return on assets – This ratio helps in understanding the productivity of the asset deployed

Return on Assets = Net income / Total assets

= 134896/1419059

= 9.5%

  • Return on Investment – This ratio helps in determining the company’s productivity with regard to capital invested

Return on Investment=Net Income/Owner’s Equity



Company’s solvency can be estimated by below ratios: -

Solvency Ratio = (Net Income After Tax-Tax Income + Non-Cash Expenses)/ (Short term

Liabilities + Long Term Liabilities)

= (134896-0+3386)/(275000)


Debt Equity Ratio = This ratio helps in understanding the debts and equity relationship

= Long term Debts/Shareholder’s Fund



Proprietary Ratio = This ratio helps is understanding proprietor’s fund ( Shareholder’s Fund or Capital Invested). Financial health of a firm is considered to be good if the ratio is high.

= Shareholder’s Fund / Net Assets

= 410000/1099831


Conclusion on Applied Accounting

This can clearly be concluded that Whadjuk_Dreaming_10474854_Sarita_Gautam_Ltd’s margin ratio is really high with gross profit margin @ 97.5% and net profit margin @ 46.3%. However, with regard to its return on asset and investment there still seems to be some scope of improvement however better picture can only be derived by comparing the same with industry benchmarking. Even the solvency ratio of the company is pretty good and hence it seems to be in good position to pay off its debts. Hence this can clearly be said that the company’s healthy and sound with regard to company’s profitability and solvency for month ended 31st Jul 2020.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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