how do you calculate PV ratio?
What do you mean by "PV" Is it Present Value, which takes some nominal amount in the future and divides by an appropriate discount rate. Or does your PV mean Profit Volume, which is profits (possibly without regard to fixed costs) divided by revenue. Or, does your PV mean something else?
In the context of calculating PV ratio, it typically refers to Profit Volume ratio. The PV ratio is a measure used to determine the relationship between the profit earned and the sales revenue generated by a business.
To calculate the PV ratio, you need to know the profit and sales revenue figures. Here's the formula for calculating the PV ratio:
PV ratio = (Profit / Sales Revenue) * 100
To calculate the PV ratio, follow these steps:
1. Determine the profit: Calculate the profit generated by the business during a specific period. Profit is typically calculated by deducting all expenses (including fixed and variable costs) from the sales revenue.
2. Determine the sales revenue: Calculate the total sales revenue generated during the same period. Sales revenue is the total amount of money earned from selling goods or services.
3. Plug the values into the formula: Divide the profit by the sales revenue and multiply the result by 100 to express it as a percentage.
For example, let's say a business has a profit of $10,000 and sales revenue of $50,000. The calculation would be as follows:
PV ratio = ($10,000 / $50,000) * 100
= 0.2 * 100
= 20%
Therefore, the PV ratio for the given period is 20%.
It's worth noting that PV ratio is a useful indicator to understand the profitability of a business in relation to its sales revenue. A higher PV ratio indicates a higher contribution of profit towards revenue, which is generally considered favorable.